[Senate Hearing 113-80]
[From the U.S. Government Publishing Office]
S. Hrg. 113-80
CREATING A HOUSING FINANCE SYSTEM BUILT TO LAST: ENSURING ACCESS FOR
COMMUNITY INSTITUTIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
SECURITIES, INSURANCE, AND INVESTMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING COMMUNITY BANKS AND CREDIT UNIONS IN THE CURRENT HOUSING
MARKET, INCLUDING THE KEY CHALLENGES AND OPPORTUNITIES FACING THESE
INSTITUTIONS SEEKING ACCESS TO THE SECONDARY MARKET
__________
JULY 23, 2013
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PRINTING OFFICE
82-781 WASHINGTON : 2014
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Dawn Ratliff, Chief Clerk
Kelly Wismer, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Securities, Insurance, and Investment
JON TESTER, Montana, Chairman
MIKE JOHANNS, Nebraska, Ranking Republican Member
JACK REED, Rhode Island BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey DAVID VITTER, Louisiana
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
KAY HAGAN, North Carolina MARK KIRK, Illinois
ELIZABETH WARREN, Massachusetts TOM COBURN, Oklahoma
HEIDI HEITKAMP, North Dakota
Kara Stein, Subcommittee Staff Director
Brian Werstler, Republican Subcommittee Staff Director
Alison O'Donnell, Economic Adviser
(ii)
C O N T E N T S
----------
TUESDAY, JULY 23, 2013
Page
Opening statement of Chairman Tester............................. 1
Opening statements, comments, or prepared statements of:
Senator Johanns.............................................. 2
WITNESSES
Sandra Thompson, Deputy Director, Division of Housing Mission and
Goals, Federal Housing Finance Agency.......................... 4
Prepared statement........................................... 35
Jack A. Hartings, President and Chief Executive Officer, The
Peoples Bank Company, Coldwater, Ohio, on behalf of the
Independent Community Bankers of America....................... 16
Prepared statement........................................... 38
Bill Hampel, Senior Vice President and Chief Economist, Credit
Union National Associationn.................................... 18
Prepared statement........................................... 41
Andrew J. Jetter, President and Chief Executive Officer, Federal
Home Loan Bank of Topeka, on behalf of the Council of Federal
Home Loan Banks................................................ 20
Prepared statement........................................... 46
Michael Middleton, Chairman and Chief Executive Officer,
Community Bank of Tri-County, Waldorf, Maryland, on behalf of
the American
Bankers Association............................................ 22
Prepared statement........................................... 57
Additional Material Supplied for the Record
Statement submitted by the Community Home Lenders Association.... 63
Statement submitted by the Mortgage Bankers Association.......... 65
Letter submitted by Chairman Tester from B. Dan Berger, Executive
Vice President, Government Affairs, NAFCU...................... 69
Letter submitted by Chairman Tester from Douglas M. Bibby,
President, National Multi Housing Council; and Douglas S.
Culkin, CAE, President, National Apartment Association......... 72
(iii)
CREATING A HOUSING FINANCE SYSTEM BUILT TO LAST: ENSURING ACCESS FOR
COMMUNITY INSTITUTIONS
----------
TUESDAY, JULY 23, 2013
U.S. Senate,
Subcommittee on Securities, Insurance, and Investment,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 3 p.m., in room SD-538, Dirksen
Senate Office Building, Hon. Jon Tester, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN JON TESTER
Chairman Tester. I call to order this hearing of the
Securities, Insurance, and Investment Subcommittee titled
``Creating a Housing Finance System Built to Last: Ensuring
Access for Community Institutions''. I look forward to hearing
from our witnesses this afternoon about the important role of
community-based institutions in the housing market as well as
challenges and opportunities facing these institutions as they
access the secondary market.
They will also discuss the relationships between community
institutions and Fannie Mae and Freddie Mac and the Federal
Home Loan Banks.
The witnesses on our second panel will highlight the
elements of the current system of housing finance that are most
critical in ensuring equal access to the secondary market for
community-based institutions, including the role of the
Government backstop.
I want to start by saying how pleased I am that we are
finally at a point where we are having a real, honest
discussion about what the future of housing finance should look
like. From my conversations with the folks on the Banking
Committee, there is consensus that the status quo is not
acceptable and that now is the time to act to create a housing
finance system built to last and to withstand the next crisis.
Now is the time for us to get to work in addressing the
unfinished businesses following the financial crisis, and if
done correctly, this could be a major driver to our recovering
economy.
I am glad that we are getting into more specifics about
what the future housing finance system should look like. In
May, this Subcommittee examined how to best bring private
capital back to mortgage markets while limiting taxpayer risk
and facilitating a stable and liquid mortgage market.
Today we are exploring an issue that is very near and dear
to my heart as well as that of Senator Johanns: how to best
ensure that community-based institutions have access to the
secondary market.
As we both know, community-based institutions play a
critical role in our housing market, providing a lifeline of
credit for many American homeowners, particularly those in
rural America. These institutions do an excellent job of
knowing and serving their customers with their unique brand of
relationship-based lending. And when it comes to mortgage
lending, these institutions have always underwritten quality
mortgages without exotic features and have been willing to
serve their communities, some that would not be served if not
for these institutions.
So as we look to the future and we consider what our system
of housing finance looks like, we must ensure that these
institutions can continue to access the secondary market and
that these institutions are not crowded out of the market or
forced to access it through their larger competitors. The last
thing that I want to see is any further consolidation in
mortgage markets.
Our housing finance system must also allow these
institutions to securitize the mortgages that they underwrite,
manage related risk, and meet the needs and desires of their
customers. It must do this while preserving the 30-year fixed-
rate mortgage in a way that small financial institutions can
continue to offer this critical product.
The stakes are high, and the consequences of community-
based institutions being pushed out of the mortgage market
would be devastating, particularly for rural America. That
simply is not an option, so I am pleased that we have some
great witnesses here today that will help us drill down in the
role of community-based institutions in the housing market,
that will help shed some light on the key issues that we should
be focusing on as we consider the future of housing finance
reform. I have worked with many of these folks in drafting
legislation along with Senators Johanns, Corker, Warner, and
other Members of the Subcommittee that both restructures the
housing finance system and retains important protections in
ensuring access to the secondary market for community-based
institutions.
Our legislation creates a mutual exclusively for small
originators to enable them to enjoy the economies of scale of
their bigger competitors and enables the Federal Home Loan
Banks to help their members securitize mortgages. These are
critical provisions that will help small financial institutions
remain a part of the game when it comes to providing choice and
competition in the mortgage origination marketplace.
I look forward to working with the Chair of the full
Banking Committee and all of my colleagues in developing
legislation that provides equal access to the secondary market
for community-based institutions, and with that I will now turn
it over to Senator Johanns for his opening statement.
STATEMENT OF SENATOR MIKE JOHANNS
Senator Johanns. Chairman Tester, let me just start out and
say thank you for calling this important hearing today and for
the great work that you and your staff have put into making
this hearing possible. I also want to say thank you to all the
witnesses that are here today.
Let me, if I might, also offer a special word of thanks to
Senators Corker and Warner for really jump-starting this Senate
debate on the critically important topic of reforming a system
that I regard as unsustainable.
As we all know, a group of eight Senators on this
Committee, four of them from either side of the aisle, recently
introduced a bill to responsibly transition out of the Fannie/
Freddie model and into a model where private investors stand in
front of the taxpayers but liquidity and affordability are
preserved.
The pieces of that bill in which Senator Tester and I took
the most interest were the provisions included to ensure small
and medium-sized lenders have equal and fair access to the
secondary mortgage market.
In every small town across Nebraska, a community bank or
credit union truly is the lifeblood of that local economy. It
is essential that these institutions can offer their customers
fixed-rate mortgages at affordable prices. While many small
institutions do, in fact, originate loans and hold them on
their balance sheet, today's volatile interest rate environment
can make that a risky proposition. Access to the secondary
market is a necessary tool to mitigate that risk, and we have
to figure out a way to maintain it.
To that end, I look forward to hearing from our witnesses
about what exactly community-based lender need to see in a
reformed housing finance system to ensure it is fair and
workable for them.
Finally, I hope today we can begin the discussion here in
the Banking Committee about the bipartisan Senate bill, what
folks like and, quite honestly, what they do not, and how it
can help the types of lenders found across Nebraska and Montana
and other States compete and thrive in the future.
With that, let me again say, Mr. Chairman, thank you for
calling this hearing. I look forward to hearing the witnesses.
Chairman Tester. Thank you, Senator Johanns.
Would anybody else like to open with a statement?
[No response.]
Chairman Tester. OK. I would like to welcome our first
panel, a panel of one. Thank you for being here and for your
willingness to testify today.
Ms. Sandra Thompson serves as the Deputy Director of the
Division of Housing Mission and Goals at the Federal Housing
Finance Agency. She oversees the FHFA's housing and regulatory
policies, financial analysis, and policy research. Before
joining the FHFA in March, Sandra spent 23 years with the FDIC,
where she held various leadership positions, including Director
of the Division of Risk Management Supervision. She has a
wealth of experience and is a strong advocate for community-
based institutions.
I want to welcome you, Ms. Thompson, and you will have 5
minutes for your oral statement, but please know that you
complete written statement will be a part of the record. Please
proceed.
STATEMENT OF SANDRA THOMPSON, DEPUTY DIRECTOR, DIVISION OF
HOUSING MISSION AND GOALS, FEDERAL HOUSING FINANCE AGENCY
Ms. Thompson. Chairman Tester, Ranking Member Johanns, and
Members of the Committee, thank you for the opportunity to
discuss the important role that community-based institutions
play in the Nation's housing finance system.
I am the Deputy Director for Housing Mission and Goals for
the Federal Housing Finance Agency. We regulate Fannie Mae,
Freddie Mac, and the 12 Federal Home Loan Banks, which,
combined, support over $5 trillion in mortgages.
For the past 5 years, we have also served as conservator
for Fannie Mae and Freddie Mac. We take this responsibility
very seriously and work hard to ensure that the enterprises
operate in a safe and sound manner.
Before joining FHFA in March of this year, I spent 23 years
with the FDIC, where I most recently served as the Director of
Risk Management Supervision. At the FDIC, I spent a lot of time
participating in outreach efforts that were specifically
targeted to understanding the vital role that community banks
play.
In a similar manner, FHFA is committed to undertaking
outreach efforts with small and rural lenders to help better
understand their access to and interaction with the secondary
mortgage markets.
Despite the fact that community-based lenders account for a
very small percent of the residential mortgage market, they do
play a vital role in serving rural and underserved communities.
They are a stabilizing force in their local markets and
generally engage in responsible lending. Community-based
lenders have a long history of making sound mortgage loans and
for the most part did not originate the abusive and predatory
loans that contributed to the financial crisis. More important,
these lenders are committed to the people and places where they
lend money.
Community institutions are particularly important in
smaller and rural areas where many loans have nonstandard
characteristics. For example, self-employed and seasonally
employed borrowers often do not have the income documentation
required to sell to large lenders. So the community lender
often keeps these loans in their portfolio. But many community
lenders can only make loans if they can sell them in the
secondary market. The private label securitizers and
correspondent banks have virtually abandoned the business.
Community lenders' primary access to the secondary market
is through Fannie Mae, Freddie Mac, Ginnie Mae, and the Home
Loan Banks. FHFA has taken steps to ensure that community-based
lenders have equal access to the secondary market. Last fall,
we increased guarantee fees for MBS swap transactions relative
to cash window transactions. Now, this is important because
large lenders primarily use the swap execution, and many small
lenders use the cash window to sell loans. The increase in
guarantee fees leveled the playing field between large and
small lenders.
FHFA has also made the enterprises' development of the
Common Securitization Platform a key component in building a
new infrastructure for the secondary mortgage market. This
framework will connect capital markets investors to homeowners
and is being developed with the potential to be used by all
issuers, large and small, Government and private sector. My
written testimony goes into detail and covers three main
points: one, that community-based institutions play an
important role in providing housing credit; two, that the FHFA
has taken meaningful steps to ensure that community-based
lenders have equal access to the secondary market; and, three,
that community-based institutions must have the ability to
fully participate in any future housing finance system. There
should not be a significant difference in how large and small
lenders are treated when securitizing residential mortgage
loans. We stand ready to work with this Committee to see this
goal reached.
Thank you, and I am pleased to answer any questions you
might have.
Chairman Tester. Well, thank you, Ms. Thompson, for your
testimony.
I am going to go a little bit out of the order that we
normally do because I know Senator Kirk has a commitment.
Senator Kirk, you have the floor.
Senator Kirk. I would just say, Mr. Chairman, thank you
very much for doing this hearing. I would say under the current
old system we can safely say that housing finance was not
broken, it was fixed. I am sure the Senator from Massachusetts
can back me up on the future bank that we will someday found
together----
Senator Warren. That is right. That is our bank.
Senator Kirk. ----based on the HSBC model that we have
talked about so many times.
Chairman Tester. Thank you, Senator Kirk.
I think we will put 5 minutes on the clock and go down the
road here.
Ms. Thompson, you have a unique perspective in your current
role given your experience with the FDIC and your understanding
of community-based institutions. It is critically important
that these institutions remain in the business of mortgage
lending, because I know that without them many areas of my
State absolutely will not be served, as your testimony
indicated.
Your testimony highlighted your work to encourage Fannie
to--or Freddie to back away from the proposed low activity fee.
But looking to the future, how do we ensure that the standards,
requirements, and pricing for small institutions seeking access
to the enterprises are risk based and are not cost prohibitive
or have the effect of pushing small institutions out of the
marketplace.
Ms. Thompson. Thank you, Senator. I totally agree. I think
the important thing for us to do is to look at the
characteristics of the loan and take that into consideration as
opposed to having a volume based or dollar cutoff. When you
have a dollar cutoff for eligibility, that automatically
implies that bigger is better, and we know that that is not
true. It also implies that larger is less risky, so any risk-
based characteristics we can incorporate into how we define
eligibility are critical as we move forward.
Chairman Tester. OK. So what will you do to ensure that?
Ms. Thompson. Well, certainly with regard to our role as
supervisor and regulator of the enterprises, ensuring that they
have policies in place to evaluate potential counterparties
based on a risk-based assessment as opposed to a hard-dollar
threshold, because, again, when you have such a blunt number
cutoff, it just makes it very difficult for smaller and perhaps
less risky institutions to participate in the seller servicer
model. And, again, I do believe that size is good, but bigger
does not necessarily mean better.
Chairman Tester. OK. In your testimony, you noted that the
cash window volume at Fannie tripled from 2007 to 2012 and
doubled at Freddie over the same time period. What is the
reason for this?
Ms. Thompson. Well, actually I went back and looked at the
flow for both MBS swap transactions and cash window
transactions before the crisis and currently. And it was
interesting because, before the crisis, the volume was almost--
it was de minimis on a good day. But I think that there is an
openness and receptivity to the entrance of small market
participants, and that has been evidenced at both Fannie and
Freddie as more and more people get back into the market. As
the market recovers and as housing prices increase, I think
there are more opportunities for persons to engage in the
seller servicing business with Fannie and Freddie.
And as my testimony indicates, for smaller lenders, they
have to go to the cash window because many of them do not have
the volume to sell and issue mortgage-backed securities. So
they have to sell one loan at a time, so it really makes a
difference to have this mechanism available. And I would
encourage that, in any future housing finance system, small
lenders be able to sell either multiple or single loans to
whatever entity is created.
Chairman Tester. OK. Drawing on your experience at the FDIC
in risk management, how important is access to Fannie and
Freddie for community-based institutions when it comes to
providing their customers with a 30-year fixed-rate mortgage?
Ms. Thompson. Well, I think, again, there are two different
discussions to be had on that topic. Based on my experience at
the FDIC, it is hard for institutions to do the asset/liability
management with a longer-term product. But for affordability's
sake, many people opt to have that product so that they can
have an affordable mortgage product.
But I think I do not necessarily have a view on products.
What I do care about, as a former bank regulator, is making
sure that borrowers have the ability to repay mortgages and
that they understand the loans that they get and that they are
sustainable over time. And I think sound lending, which is
certainly the hallmark of community banks, especially in the
residential mortgage space, is as good as it gets.
Chairman Tester. One of us will take this up with the next
panel, but from your perspective, would the institutions that
we are talking about, the community-based institutions, be able
to provide a 30-year fixed-rate mortgage if there was not the
Government backstop?
Ms. Thompson. Well, again, I think many community banks
have to sell their mortgages under any circumstance so that
they can have liquidity to originate more mortgages. Again, I
am just not in a position to opine on products.
Chairman Tester. OK. Senator Johanns.
Senator Johanns. Thank you, Mr. Chairman.
It strikes me that the secondary market is not only an
important financing avenue but also a vital risk mitigation
tool for institutions of all sizes. It shifts both credit and
interest rate risk to investors willing to take that on.
If Congress reforms the system in such a manner that
community-based institutions do not have a workable access,
what sort of risks would be posed to those institutions? What
happens in that kind of system? Do you have higher mortgage
rates? Do you have less access to credit? Would you expect both
to occur? Fill in the blanks there, if you would.
Ms. Thompson. Senator, I think the words you used were
``workable access,'' and I think having access to the secondary
market is critical, again, for community lenders, and whether
they have it directly or through an aggregation process, the
ability to originate and some absolutely have to sell. So I
would think that in whatever future state would being developed
by the Congress, that they would take those matters into
consideration as we move forward, because, again, the secondary
market is just absolutely critical, and access to that market
is critical for the community lenders.
Senator Johanns. Chairman Tester has referenced this, and I
think it is a very valid point that maybe you can offer some
more testimony on, and that is, if we do not get this right and
your community banks, your community lenders are not a part of
the future going forward, then access to those services
disappears in parts of our State. I mean, literally it is gone.
Is that a correct observation?
Ms. Thompson. I think that is accurate. When you look at
the banking system, I know there are almost 7,000 insured
depository institutions, and of those 7,000, there are 117,
give or take a few, that have assets over $10 billion. By
number, community banks, and most of them, about 4,200, have
assets of $250 million or less. So throughout the country by
number, community banks are important. Dollar size and asset
size, of course, the reverse is true. So 10 percent of the
institutions hold 90 percent of the assets. But I do not think
that the larger institutions particularly have an interest in
this space that the community banks serve. And based on the
experience I had at FHFA now and prior to that at FDIC,
community banks are more than just a bank. Community
institutions are a big part of those communities, and but for
them--they do more than lending. They provide lots of services
to the communities they serve. And many of them do not serve
just one community. They serve multiple, and sometimes across
State.
So I would hope that whatever policies the Congress decides
to come up with, I think that certainly access for rural and
community institutions is critical. It is in the public
interest.
Senator Johanns. In your testimony you made mention of
FHFA's work to encourage consistent customer access as well as
to work to discourage Freddie Mac from imposing a so-called
low-activity fee. To what extent should we ensure that equal
pricing across lenders of all sizes such as the prohibition on
volume discounts, like we have in our Senate proposal? It seems
to me that Wells Fargo should get the same price for selling a
qualified mortgage to the guarantor as First National of Omaha.
That is what it seems to me should be the case. Are there
positives and negatives to the approach we are taking?
Ms. Thompson. Well, I think that certainly transparency is
important, and fair pricing certainly ought to be a standard,
and there ought not be benefits versus one over the other. But
I would say that a risk-based approach that looks to the
characteristics of the loan is probably fair for all lenders,
because if you look at, let us say, LTV, FICO, DTI, and there
are no disparities, you can price based on risk. And I think a
risk-based approach versus, again, a blunt dollar amount or a
volume really is more appropriate.
Senator Johanns. OK. Thank you, Mr. Chairman.
Chairman Tester. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. You know, I have
been looking forward to this hearing because I think there are
two principles at stake here. The first is we need housing
finance reform. It has been 5 years since the crash and long
past the time we need to make these reforms. But the second is
we need to do it right. We are only likely to get one bite at
this apple, and doing it right here means making sure that our
small financial institutions, our community banks, our credit
unions, still can thrive and be in an atmosphere where they can
do that.
So I am very grateful to you for having the hearing here
today, and what I would like to ask about follows up on what
Senator Johanns had started with just a minute ago, and that
is, as I understand it, Fannie and Freddie buy loans from
lenders, pursuant to the terms of the individual contracts, as
you identified. But depending on the lender and the
transaction, the contracts can either be one-off or they can be
master agreements that cover a lot of loans. And Fannie and
Freddie currently keep the prices in terms of these individual
agreements secret, but we do know from their past disclosures
that the agreements tend to favor the largest financial
institutions.
So what this means, in other words, is that Fannie and
Freddie have charged our community banks and our credit unions
more than they have charged the big banks for what might
otherwise be exactly the same product.
So I think that transparency is powerfully important in any
housing finance reform, but I am curious about how FHFA could
make immediate improvements by requiring Fannie and Freddie to
disclose all of their agreements with the individual lenders--
that is, past, present, and future.
So do you have any thoughts on Fannie and Freddie's basis
for not making the terms public and whether the FHFA should
require Fannie and Freddie to disclose this information
publicly?
Ms. Thompson. Well, Senator, I had not thought about the
agreements per se. I was looking at pricing, and we did take a
look at G-fees last year, and when we report to Congress
annually, we do an annual G-fee report. One of the things that
we do is we break the lenders or sellers to Fannie into three
different categories: 1 to 5, 6 to 100, and 100 and below. And
the larger ones are in the 1 to 5 category, and the smaller
ones are in the latter category of 100 and below. And one of
the steps----
Senator Warren. And 100 and below referring to?
Ms. Thompson. 100 and--the top five lenders in terms of
volume.
Senator Warren. That is right, total volume that the lender
does.
Ms. Thompson. Total volume of the lender. And so one of the
things that we did last year in September when we increased G-
fees was we, again--and I mentioned this in the testimony--we
did raise the G-fees for the swap, the larger transactions
relative to those participants in the smaller transactions. So
when you look at the smaller, which is the 100 and below, and
then the larger, when we raised the G-fees, there certainly is
now an equal playing field. And I think the principles ought to
apply.
One of the things that we are working on is trying to
provide some uniform data standards, because right now there is
a standard for Fannie, there is a standard for Freddie. And to
the extent that we have a single data standard that we can have
uniform reporting, uniform disclosures, those are the things
that help drive the price down, when there is one set of
standards that everyone knows, that people are aware of, it
just makes it clear for all mortgage participants to work
toward that end.
Senator Warren. So, Ms. Thompson, I completely agree with
you about the importance of standardized reporting so that you
can make comparisons so the markets become transparent and we
can tell. And I want to ask you a question about that in just a
second, but I want to make sure I have kind of dug in on this
question about what Fannie and Freddie do now.
I appreciate the point you make about changing the fees,
but as I understand it, Fannie and Freddie still do not
disclose what they are charging. And so my question is whether
or not this is something FHFA could think about. As we heard
toward reform, you know, it is like a lot of things. You kind
of smooth it in if you start making changes now, and Fannie and
Freddie were required by FHFA to make full disclosure of how
they have priced in the past, how they are pricing now, how
they continue to price in the future, whether or not that might
be a helpful way both to understand how this market operates
now and to make certain going forward that this market is a
level playing field for our community banks and credit unions.
Ms. Thompson. I think we could take that into
consideration.
Senator Warren. That would be enormously helpful. Thank
you. And we will get back someday to the question about how to
make sure that we get uniform reporting, but count me as a big
supporter on this, and we will have a good conversation about
data tagging and keeping the information going forward. Thank
you, Ms. Thompson.
Chairman Tester. Senator, we may well have a second round.
Senator Corker.
Senator Corker. Thank you, Mr. Chairman. I want to thank
you and the Ranking Member for your interest not only in GSE
reform but also in particular paying a lot of attention to how
to fix the smaller institutions. And I know in your two States
in particular, but all of ours, it is a very important issue,
so thank you.
I will make note that of the eight people who have been
here on the dais, seven of the eight have actually supported
and introduced and affected in big ways a bill that would
transition us, to use Senator Warren's--you know, as things are
smoothed out, transition us into a better place. And I want to
thank everybody who has been involved in that effort.
I do want to point out that one of the attributes of
preconservatorship, going back to, again, more questions that
Senator Warren asked, Fannie and Freddie were giving volume
discounts, and so the big guys were getting bigger and the
small guys that many of us represent were at a disadvantage.
Would you agree that if there is going to be an explicit
guarantee--and there is today. You know, because of what has
happened, there is, in fact, an explicit guarantee. But going
forward, would you agree that if there is a Government explicit
guarantee that everybody ought to be charged the same price for
that guarantee?
Ms. Thompson. I absolutely think that that is something
that I would have to take back to my agency to consider. It
sounds perfectly reasonable, and, again, there are so many
complexities, it is just hard to give you a good answer.
Senator Corker. Well, the bill that many of us have worked
on does that. Let me ask you this question: In the event there
was not a Government backstop of some kind--and I think, you
know, most people on this Committee have come to the conclusion
that some type of backstop is a reasonable place to be. But
without a backstop, what would happen with the smaller
institutions as far as wouldn't the larger institutions more
and more dominate the market if there were not some kind of
Government backstop?
Ms. Thompson. It is likely that if the--the smaller
institutions would have to pay more because they would have to
go through an intermediary, an aggregator to get direct access
to selling their loans. But it is just hard to say what would
happen with or without a Government backstop.
Senator Corker. But it would make sense, I think, if you
did not have that element of reinsurance, that over time the
larger entities would have the ability to deal with the
secondary market in a way that the smaller institutions would
not. Is that correct?
Ms. Thompson. Correct, Senator.
Senator Corker. I love leading you as a witness. I
appreciate that.
[Laughter.]
Senator Corker. Let me ask you another question in a
nonleading way. Do you agree that having a situation where
there is a Government backstop implied but that you have CEOs
of entities that really are not focused on that particular
aspect, which has to do with the taxpayers, but instead is
focused on shareholders, that that is an untenable place for us
as a Nation to be?
Ms. Thompson. Senator Corker, that is way above my pay
grade, and I would defer to not answer that.
Senator Corker. OK. Well, as an editorial comment, I will
say then that I think what--actually, I think what most people
on this Committee have come to the conclusion of, that model of
having private shareholder gain and taxpayer losses where, in
essence, the shareholders' interests are well served in good
times but the public's interests are not well served during bad
times is a model that we need to move beyond. There may be
differing ways of getting there, but I think just in looking at
the body language, I think most people think that is not a good
place to be. And it looks like you might want to answer now.
Ms. Thompson. Well, Senator, I did want to highlight that
we are engaged in some credit risk-sharing transactions, and
one of the things that Director DeMarco has done is establish a
scorecard for the enterprises. And part of that scorecard, they
have been asked to participate in multiple types of credit
risk-sharing transactions so that we can bring private sector
money back into the securitization market. And I do think that
risk sharing is important, and I did want to raise that to your
attention.
Senator Corker. And I think that, you know, as I mentioned,
seven of the eight people who have been here today, and
hopefully more, really believe that it is important to have
that risk sharing up front. And I want to thank you and actual
the FHFA for leading--giving us a bread trail, if you will,
toward that end. I know that you all are building toward an end
where there is that private sector risk, which a bill that many
of us have worked on together takes us to, and we thank you
because we really believe we are working in the same direction
and think that is very productive and helps create this
smoothing effect that Senator Warren just talked about.
Ms. Thompson. Senator, we did want to take the opportunity
to thank you for introducing the legislation. We are just glad
that the policy makers have moved forward and introduced
legislation. So we just wanted to say thank you.
Senator Corker. Thank you very much.
Chairman Tester. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. I appreciate that
you and the Ranking Member both support this new legislation,
holding this hearing. I would have preferred the opportunity to
go in front of my friend Senator Corker since he asked all the
questions I had, but I will find a way to----
[Laughter.]
Senator Warner. ----come back around to them in a different
way.
Chairman Tester. Senator Heitkamp has some different
questions if you would like me to move.
[Laughter.]
Senator Warner. And I know I may be just going back over
ground that has already been tilled, but I just cannot
imagine--there is another proposal being put forward in the
House that would remove any Government backstop, that would
take out any private sector role, and I just do not see--can
you envision a system in which that takes place? And, Senator
Johanns, First Mutual of Omaha, what was your institution you--
--
Senator Johanns. First National.
Senator Warner. How would First National in Omaha in that
system ever be able to compete with Wells Fargo or JPMorgan?
Can you envision a system where they would be on an equal
footing, Wells Fargo and JPMorgan?
Ms. Thompson. Senator, I am envisioning the Congress
working to enact legislation that I am happy to implement,
and----
Senator Warren. No, but you are an expert in the field. I
would just think that you would have to have some sense
whether, you know, First National of Omaha is ever going to
have in a private sector-only system the ability to have equal
access to a secondary market that a loan that was originated
out of Wells or JPMorgan--I do not mean to be--just you have
got a lot of experience. Is there a way to get there with that
possibility?
Ms. Thompson. It is difficult to imagine. I have never
worked in an environment where there was not that. But, again,
I am just not certain, and I think that making sure that the
Omaha or Nebraska institution has access to the secondary
market, however they can, is done in a fair, transparent, and
least costly--I would be concerned about cost, I guess, more
than anything.
Senator Warner. Right. And I guess one of the things that--
you know, and you were kind enough to reference the legislation
that some of us have worked a long time on. One of the ways,
just to--I am sure most of the folks in the audience realize
this--that we tried to ensure that access for community-based
institutions, credit unions, and others was, you know, to--
because we wanted a more competitive system of issuers, was to
take some of those intellectual assets and other assets that
are within Fannie and Freddie and create a co-op that would
make sure that it had as its priority making sure that
community banks and credit unions had that fair access and that
pricing equality. As a matter of fact, as the legislation
states, we even guarantee that pricing equality. As a matter of
fact, as the legislation states, we even guarantee that pricing
equality. I think one of the comments you made--and I think we
all agree with this--pricing equality based upon access to a
secondary market, obviously if there are loans of different
quality, that has to be dealt with.
Ms. Thompson. That is correct, sir.
Senator Warner. But I do think that the approach that this
group is taking, you know, guarantees that access because if
there is--again, one of the lessons that we have seen from the
crisis is that when stuff hits the fan, sometimes it is these
smaller institutions that stay in the communities, that stay
through good times and bad, and that we have seen, again, from
some of the data that you have, a relatively dramatic increase
in the market share that these smaller institutions have had
postcrisis versus precrisis. Correct?
Ms. Thompson. That is exactly correct, Senator.
Senator Warner. And I would argue that is, again, a good
thing in terms of keeping the value of these institutions.
I guess I want to just raise one other thing that Senator
Warren raised. I agree that we need more transparency and that,
again, a piece of this legislation that is bouncing around up
here actually moves forward with what FHFA has been doing in
terms of trying to create this Common Securitization Platform
around reps and warranties, around documentation, that would
allow transparency and really make sure this is a utility
function. And I would echo, subject to being, you know,
explained otherwise, why Senator Warren's comments would not be
kind of right on, at least in that transition, why we should
not have more of that transparency sooner than later, although
again we envision that Common Securitization Platform being an
essential utility component of this new reform we have.
I do not want to lead you as well, but since you are
welcoming this legislation, is it safe for me to infer that you
do not think the status quo or recapitalizing Fannie and
Freddie is the appropriate role?
Ms. Thompson. Well, not to provide my personal opinion, I
just think that housing finance needs to be reformed. I am
happy to see legislation that moves in the right direction.
Fannie and Freddie, again, the model was broken. And to the
extent that----
Senator Warner. So a long-term conservatorship for Fannie
and Freddie is not a valid option.
Ms. Thompson. Five years is a really long time for a
conservatorship, and longer than that is quite unimaginable.
Senator Warner. Thank you, Mr. Chairman. Thank you, ma'am.
Chairman Tester. Senator Heller.
Senator Heller. Thank you, Mr. Chairman and Ranking Member.
I appreciate the opportunity to crash your Subcommittee. I know
you do not see me enough, so I thought I would stop by. But
this is an important issue, and you and I have had an
opportunity, Mr. Chairman, in your office to talk about banking
and the problems with community banking that we have in some of
our more rural States and our more rural areas within our
States.
I would argue that the economic downturn probably had more
to do with housing, at least in our communities, than any other
issue. I know gasoline prices played a big role in that also,
but ultimately it was the crash of the housing market.
In Nevada--and I know some of my colleagues have heard this
before, but over 50 percent of the homes in Las Vegas today are
underwater. We have over 400,000 homes in Nevada that have
received foreclosure notices. And, you know, to make matters
worse, we have probably lost half of our community banks in the
last 5 years, probably half of those banks--I mean, obviously
making it very difficult for the economy to bounce back.
We had a report last week on unemployment, and it actually
jumped half a point in Nevada last week, although I do see and
most people are noticing that there is some recovery that is
occurring in my home State.
So putting all those issues together, you can imagine the
concern and the reason why I am here to have this discussion
with this panel, because I believe the panel that is here today
are, frankly, the individuals that are going to help solve this
problem in the future.
So my question, since you are the expert, is: Have you had
an opportunity to take a look at the Corker-Warner bill? Do you
have any insight or opinions on it?
Senator Warner. Corker-Warner-Heller bill?
[Laughter.]
Ms. Thompson. Senator, again, we are very happy that the
legislation has been introduced. We have formed a working group
to take a closer look at it, and we have not come to any
determinations. But we are happy to, when we are done, provide
any technical advice you would like on certain aspects of the
bill.
Senator Heller. OK. You made comments earlier in your
discussions with others on the panel about the importance of
the secondary market, and I agree with you 100 percent. I think
there is a role for the secondary market. I think there is a
role for Government to play in that to make sure that there is
some level of certainty and liquidity out there so that these
home loans can be made. And I think you have answered this
question. We keep asking you the same question over and over
again, but we are trying to get to the bottom of whether or not
you believe that Freddie and Fannie need to be reformed.
Ms. Thompson. I think housing finance needs to be reformed.
I think there needs to be a level playing field for anyone who
wants to issue, whether you are large or small. I do think it
is important, again, for special attention to be paid to the
smaller institutions because of the public interest that they
serve in communities across this country. I just think that is
critical. So whatever legislation is introduced and enacted, I
do believe that that is a crucial part to the long-term
recovery of our Nation.
Senator Heller. If after 5 years we do nothing, what would
the consequences of that be?
Ms. Thompson. It would be very--it is hard to imagine.
Certainly I am hoping that that will not be the case, that
whatever legislation the Congress agrees upon will be enacted
and we will be well along the way of implementing housing
reform legislation. I just hope that that is not the case.
Senator Heller. Do you believe that this lack of housing
reform or as slow as we have moved here in Congress had--do you
believe that that has slowed our economic recovery?
Ms. Thompson. I believe that this is the last piece that
needs to be addressed. Again, I worked for--spent the last 23
years at the FDIC and just came out of a banking crisis, and
certainly housing was a big part of that. I just believe that
once we get this done, we will be well along our way to a
recovered Nation.
Senator Heller. Do you believe by not doing any reforms to
Fannie and Freddie that we would be susceptible to another
housing market crash?
Ms. Thompson. Fannie and Freddie just absolutely have to be
reformed. That model was broken, and they had to borrow $185
million from the taxpayers, and it is just untenable. They are
not capitalized entities, and this is a big part of our housing
future, and we need to fix it.
Senator Heller. Ms. Thompson, thank you for your testimony.
Again, Mr. Chairman, thank you for allowing me to come in
and ask a few questions.
Chairman Tester. You are welcome anytime.
Senator Heitkamp.
Senator Heitkamp. Thank you so much, Mr. Chairman and
Ranking Member. This is critically important, and I always
think it is interesting to follow Senator Heller because North
Dakota's situation could not be more different from the
situation in Nevada, where they are seeing houses underwater,
excess capacity in the market. In North Dakota, we think we
need to build about 33 percent more units by 2025. But I want
to bring the subject back because, at the very heart of it,
every person here who is representing a different situation is
telling you that it is absolutely critical that we maintain a
role for independent community banks and credit unions, and
that when we are all wringing our hands in despair over too big
to fail, we are setting policies in Washington, DC, that are
consolidating more and more assets into the larger banks and
diminishing the capacity of the smaller community banks to
participate in the marketplace, and that has to end.
Now, I know you are frustrated with all of us because we
are trying to get you on board here, and we really do----
[Laughter.]
Senator Heitkamp. We really do appreciate your advice. But
I would emphasize to you we need your leadership, and it is not
leadership to come and not, you know, kind of say we will help
you in any way you can. You are the experts. We represent a lot
of different folks, a lot of different constituencies. We need
the expertise that you bring and that the other panels bring.
But we also need your leadership, and we need you to be
weighing in on the important policy questions.
And so, you know, I hope that as you explore the Corker-
Warner-Heller-Tester-Heitkamp--you know, we could go on and on,
but those are the ones who are here--bill, that as we have said
many times, we think we have done a pretty good job, but
nothing is perfect, and we need leadership from the
administration.
But I want to turn to a topic that is maybe unique and
different in my State, and that is, appraisals. You know, I
recently had an opportunity to get an appraisal in Washington,
DC, and shock upon shock, it only took a week. And if I were
going to do that in North Dakota right now, it would be 6 to 10
months--or 6 to 10 weeks. We cannot move forward, in part
because of the impediments and because of the requirements.
I also would tell you that I am from a small town of 90
people, grew up in a little small town of 90 people. If
somebody wanted to sell a house, good luck finding comparable
sales within a 10-mile radius. There is too much one-size-fits-
all in the housing market, and that is even more discouraging,
not just for the industry but for the homeowners as they are
trying to transition out and build opportunities.
Do you think that would be appropriate to take a look at
areas like Senator Tester and Senator Heller and I represent
where, you know, you could not see another person for miles and
miles, take a look at those kinds of areas and look at some
different standards as it relates to quality of mortgages?
Ms. Thompson. I absolutely agree with you, Senator. In
fact, a couple of institutions have raised the issue of
appraisals that describe just exactly what you are talking
about. The next home may be 10 miles away----
Senator Heitkamp. That is typical.
Ms. Thompson. ----so it is very difficult to find a
comparable appraisal value. And so we have been engaging with
both Fannie Mae and Freddie Mac about their seller servicer
guide and the standards, and in particular highlighting here is
the policy, but here is how it applies to rural and small
communities, and here is how it applies to you. And we do
believe that certainly the policies you make in Washington, it
is not one-size-fits-all, and it is not bigger is better. And
you have to take a risk-based and specific targeted approach to
address the issues that are relevant to the city you are in,
the two you live in, or the issue that you are facing. And I
certainly could not agree with you more about appraisals.
Senator Heitkamp. Thank you.
Chairman Tester. Well, thank you, Ms. Thompson. We
appreciate you being here very, very much, and we will stay in
touch.
We will now proceed to the second panel, and while the
witnesses are setting up, I am going to read a brief bio on
each of them.
First of all, we have Jack A. Hartings who serves as vice
chairman of the Independent Community Bankers of America and is
the president and CEO of The Peoples Bank in Coldwater, Ohio.
He previously served as State director for ICBA and as chairman
of ICBA's Policy Development Committee. Mr. Hartings also
serves as a member of the Consumer Financial Protection Bureau
Community Bank Advisory Council. Welcome, Mr. Hartings.
We have Mr. Bill Hampel, who is the senior vice president
of research and chief economist for the research and policy
analysis at the Credit Union National Association. Mr. Hampel
writes economic analysis columns that appear in several credit
union publications. Prior to joining CUNA, he taught economics
at several universities, including the University of Montana
and Iowa State University. Welcome, Mr. Hampel.
We have Mr. Andrew Jetter, the president and CEO of the
Federal Home Loan Bank of Topeka. He joined the FHLB Topeka in
1987 as an attorney and served as general counsel and senior
vice president through his tenure with the bank. Before joining
FHLB Topeka, Mr. Jetter was engaged in private practice in law
and served as a full-time instructor in the areas of finance
and management at the University of Nebraska at Omaha. Welcome.
And last, certainly not least, Michael Middleton is the
chairman and CEO of the Community Bank of Tri-County. Mr.
Middleton joined the bank is 1973 and was promoted to president
and chief executive officer in 1979. He is also chairman of the
Board of Directors of the Maryland Bankers Association and is
former chairman of the Board of Directors of the Federal Home
Loan Bank of Atlanta. Welcome, Mr. Middleton.
Each of you, as with the previous panel, will have 5
minutes, and your entire written statement will be put in the
official record. You can start, Mr. Hartings.
STATEMENT OF JACK A. HARTINGS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE PEOPLES BANK COMPANY, COLDWATER, OHIO, ON BEHALF
OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. Hartings. Thank you. Chairman Tester, Ranking Member
Johanns, Members of the Subcommittee, I am Jack Hartings,
president and CEO of The Peoples Bank Company and vice chairman
of the Independent Community Bankers of America. The Peoples
Bank Company is a $400 million asset bank in Coldwater, Ohio,
and I am pleased to represent community bankers and ICBA's
nearly 5,000 members.
Any broad-based recovery of the housing market must involve
community bank mortgage lending. Community banks represent
approximately 20 percent of the mortgage market, but more
importantly, this lending is often concentrated in the rural
areas and small towns not effectively served by large banks.
For many borrowers in these areas, a community bank loan is the
only option.
The Peoples Bank Company serves a community of
approximately 5,000 people and has been in business for over
100 years. Our bank survived the Great Depression and numerous
recessions--as have many other ICBA member banks--by practicing
conservative, commonsense lending.
Today I would like to talk to you about my bank's mortgage
lending and the importance of the secondary market. Mortgage
lending is about 80 percent of my business. The Peoples Bank
Company is the number one mortgage lender in my county, Mercer
County. About half of the mortgage loans my banks makes are
sold, mostly to Freddie Mac, with a smaller portion sold to the
Federal Home Loan Bank of Cincinnati. The secondary market
allows us to meet customers' demands for fixed-rate mortgages
without retaining the interest rate risk these loans carry.
Selling into the secondary market frees up our balance
sheet to make more residential mortgage loans as well as small
business loans, which play a vital role in our community.
ICBA developed a comprehensive set of secondary market
reform principles.
First, community banks must have equal and direct access.
We must have the ability to sell loans individually for cash
under the same terms and pricing available to the larger
lender.
Second, customer data cannot be used to cross-sell
financial products. We must be able to preserve customers'
relationships after transferring the loans.
Third, originators must have the option to retain servicing
rights at a reasonable cost. Servicing is critical to the
relationship lending business model vital to community banks.
Finally, private capital must protect taxpayers. Securities
issued by secondary market entities must be backed by private
capital and third-party guarantors. Government catastrophic
loss protection, which is critical during periods of market
stress, must be fully priced into the guarantee fee and the
loan level price.
Without these principles, there could be further
consolidation of the mortgage market, which would limit
borrower choice, disadvantage communities, and put our
financial system at risk of another collapse.
ICBA is pleased to see the robust debate emerging on
housing finance reform. Many of these ideas and proposals
provide promising features but also warrant additional
consideration and reworking.
ICBA welcomes the deliberation of the future of housing
finance and the important role of community banks such as mine
in the mortgage market. ICBA is grateful to Senators Warner,
Corker, Tester, and Johanns for introducing S.1217 and to
Senators Hagan, Moran, Heller, and Heitkamp for their
cosponsorship.
ICBA sincerely appreciates the opportunity to provide input
into this bill. We are encouraged by the inclusion of certain
provisions to accommodate ICBA's concern, and I note four of
those in particular:
First, the mutual securitization company would secure
access to the secondary market for community banks and other
small originators and would allow them to sell loans for cash
and to retain their servicing.
Second, the Federal Home Loan Banks would also be allowed
to issue securities, creating another access point for
community banks.
Third, limiting issuers to no more than 15 percent of the
outstanding guaranteed securities would reduce concentration in
the securitization market by large banks or Wall Street firms.
Last, the FMIC guarantee, well insulated by private
capital, would insure the securitization market continues to
function even in times of market stress.
We look forward to continuing to work with the other
cosponsors and the Chairman and the Ranking Member to further
strengthen this bill and to ensure it serves the needs of
community bank customers.
I want to thank you again for holding this hearing and for
the opportunity to testify, and I look forward to your
questions.
Chairman Tester. Well, thank you, Mr. Hartings, for your
testimony, and just for the record--and you did not know this--
but other than the nine you listed, we can also add Senator
Manchin as an original cosponsor. With that, thank you for your
testimony.
Mr. Hampel, you may proceed.
STATEMENT OF BILL HAMPEL, SENIOR VICE PRESIDENT AND CHIEF
ECONOMIST, CREDIT UNION NATIONAL ASSOCIATION
Mr. Hampel. Thank you. Chairman Tester, Ranking Member
Johanns, Members of the Subcommittee, thank you for the
opportunity to testify at today's hearing. I am Bill Hampel,
chief economist for the Credit Union National Association,
which represents the Nation's almost 7,000 credit unions and
their 97 million members.
CUNA appreciates the attention this Subcommittee is
focusing on housing finance reform. Credit unions need fair and
equal access to a secondary market for lenders of all sizes,
one that will ensure affordable mortgage products for our
members. My written testimony describes in detail the current
state of mortgage lending by credit unions; the importance of
the 30-year fixed-rate mortgage; the need for some form of
Government guarantee so long as there are adequate taxpayer
protections; and, finally, it offers some comments on S.1217.
Credit unions have been actively engaged in mortgage
lending since the 1970s. Our origination volumes rose sharply
in the recent financial crisis as credit unions remained able
to lend while major parts of the secondary market collapsed.
Last year, credit unions originated $123 billion of first
mortgage loans, representing 6.5 percent of the market, and
over 80 percent of those loans were fixed-rate loans. Credit
unions are now significant players in residential real estate
finance.
Credit unions originate mortgage loans both for their own
portfolios and for sale to the secondary market. The decision
to hold or sell a loan depends primarily on the management of
interest rate risk as opposed to the desire to offload
excessive credit risk. Interest rate risk considerations can
vary through time. Up until 2008, credit unions sold only a
third of their new loans. Since then, as long-term interest
rates have plummeted, credit unions have found it prudent to
sell more of their new loans so as to not repeat the savings
and loan debacle of the 1980s. In the first quarter of this
year, they sold almost 60 percent of their originations.
At current low interest rates, mortgages are much more
appropriately financed by investors with a long-term horizon
such as life insurance companies and pension funds than by
depository institutions.
The fact that many loans will be held on credit unions'
books makes them prudent lenders. Even at the depths of the
recent financial crisis, losses on credit union-held first
mortgages remained remarkably low, peaking at less than one-
half of 1 percent of loans outstanding. At commercial banks,
similar calculated losses peaked at almost four times that
amount, and loss rates at other lenders were undoubtedly even
higher.
The fact that interest rate risk management often requires
selling a significant portion of loans means that a robust and
accessible secondary market is vital to credit unions.
We fully appreciate the need to reform the current system
of housing finance. We are concerned, however, that the reform
does not hinder the ability of credit unions to meet their
members' housing finance needs in a member-friendly,
cooperative way. Because of this concern, we have a few
principles that we feel strongly the new system must
accommodate.
First, there must be fair access to the secondary market
for lenders of all sizes.
Second, the entities providing secondary market services
must be subject to rigorous regulatory and supervisory
oversight to ensure safety and soundness and equal access.
Third, the new system must ensure that, even in troubled
economic times, mortgage loans will continue to be made
available to qualified borrowers.
Fourth, the new housing finance system should emphasize
reasonable consumer education and counseling.
Fifth, the new system should include consumer access to
mortgage loans with predictable, affordable payments for
qualified borrowers. This has traditionally been provided
through the 30-year fixed-rate mortgage.
Sixth, the new housing system should apply reasonable
conforming loan size limits that adequately take into
consideration variations in local real estate costs.
Seventh, the important role of Government support for
affordable housing should be a function separate from the
responsibilities of the secondary market entities. The
requirements for a program to stimulate the supply of credit to
lower-income borrowers are not the same as those for the more
general mortgage market.
Eighth, most market participants define ``servicing'' as
the process whereby monthly payments from borrowers are routed
to investors and how delinquencies are handled. While credit
unions understand the importance of those functions, they view
loan servicing more as an opportunity to continue to provide
excellent service to their members after the loan has been
made. Credit unions are also concerned about the continued
confidentiality of their members' data. Therefore, it is
critical that credit unions are able to continue to perform
servicing for their members in the future.
And, last, the transition from the current system to any
new housing finance system must be reasonable and orderly.
As we continue to study S.1217, we are encouraged that it
largely addresses our principles. CUNA especially appreciates
the leadership of Senators Corker and Warner and the rest of
the sponsors of the bill to ensure that credit unions and other
small community lenders will continue to have access to the
secondary market. Through the creation of the Mortgage
Insurance Fund, the bill goes to great lengths to protect the
taxpayer while providing a necessary ultimate Government
backstop.
In summary, CUNA believes that S.1217 is a positive step
toward creating a sustainable and affordable housing market.
Thank you again for allowing me to testify today on behalf of
America's credit unions, and I look forward to your questions.
Chairman Tester. Thank you, Mr. Hampel.
Mr. Jetter.
STATEMENT OF ANDREW J. JETTER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL HOME LOAN BANK OF TOPEKA, ON BEHALF OF THE
COUNCIL OF FEDERAL HOME LOAN BANKS
Mr. Jetter. Good afternoon, Chairman Tester, Ranking Member
Johanns, and Members of the Subcommittee. My name is Andrew
Jetter, and I am the President and CEO of the Federal Home Loan
Bank of Topeka. I appreciate the opportunity to speak to you
today on behalf of the Council of Federal Home Loan Banks.
Congress created the Federal Home Loan Banks in 1932 to
support America's housing finance system by providing liquidity
to thrift institutions and insurance companies. Since that
time, Congress has expanded the mission of the banks to include
support for affordable housing, community development, and
other forms of community lending, and opened membership to
commercial banks, credit unions, and community development
financial institutions. Although Congress has expanded our
mission, our core structure remains unchanged: 12 independent
cooperatives, each with our own capital, membership, boards of
directors, and management.
During the Nation's financial crisis, the Federal Home Loan
Banks were a critical source of funding for U.S. financial
institutions. The Banks expanded their lending to members of
every asset size and in every part of the country, with loans
to members, what we call ``advances,'' increasing from $650
billion in 2007 to over $1 trillion in 2008. And, importantly,
the Federal Home Loan Banks took no taxpayer dollars.
The Federal Home Loan Banks are financially strong and
stable. 2012 net income was $2.6 billion, and the banks ended
the year with over $10 billion in retained earnings. Each bank
is now allocating 20 percent of its net income to a special
restricted retained earnings account.
The Council welcomes the opportunity to share our views on
housing finance reform. We commend you for your extensive
efforts in working to achieve a sustainable housing finance
system that also protects the taxpayer.
As you consider the future role of the Federal Home Loan
Banks, you have appropriately recognized that the Federal Home
Loan Banks are very important to community financial
institutions. These smaller institutions often have limited
options and depend on the products and services provided by the
Federal Home Loan Banks.
Community financial institutions are significant players in
housing finance. Their core strength is their deep knowledge of
local markets and their personal relationship with customers.
In smaller communities and in rural markets, community
financial institutions are often the sole source of mortgage
credit.
Community financial institutions originate a significant
amount of mortgage loans. In the first quarter of 2013, banks
and thrifts with less than $10 billion in assets originated $55
billion in residential mortgages. They also held on balance
sheet approximately $500 billion in mortgage loans and $300
billion in mortgage-backed securities.
Mr. Chairman, community financial institutions are dealing
with enormous challenges and uncertainty. We are currently
conducting a survey of our members to understand how we can
better assist their housing finance activities. Some of the
initial feedback is disturbing, as many of these institutions
are questioning their ability to continue as housing lenders.
Much of the concern relates to the new rules around qualified
mortgages and the capital requirements under the new Basel III
rules. While some progress has been made, more needs to be
done.
We are proud that the Federal Home Loan Banks have a long
history of supporting the housing finance activities of
community financial institutions. For portfolio lenders, we
offer a variety of products that help them hedge the risk of a
long-term fixed-rate mortgage portfolio. We offer long-term
fixed-rate advances, advances that amortize similar to a
mortgage, and advances that are prepayable to match the
prepayment option in mortgages. We provide technical assistance
to help members quantify and manage the interest rate risk from
a portfolio of fixed-rate loans.
We also support their secondary market needs through our
mortgage programs. These programs combine the credit expertise
of a local lender with the funding and hedging advantages of
the Federal Home Loan Banks. Most of the members participating
in our mortgage programs have less than $1 billion in assets.
Many of the Federal Home Loan Banks offer MPF Xtra. Through MPF
Xtra, mortgage loans are aggregated through the Banks and sold
to Fannie Mae. This program allows small members to sell loans
at prices competitive with larger institutions.
We are very pleased that S.1217 recognizes the importance
of maintaining a role for institutions of all sizes in the
housing finance system of the future. We believe providing
reliable access for small and midsized lenders to the secondary
market is very important.
We appreciate that the bill provides different options for
the Federal Home Loan Banks to serve their members in the
future. Along with our members, we are open to exploring
opportunities to expand our support of community lenders in
housing finance.
At the same time, we recognize the paramount importance of
maintaining and protecting our continuing role as a reliable
source of liquidity for our members.
Chairman Tester, Ranking Member Johanns, thank you for the
opportunity to appear before you today.
Chairman Tester. Thank you for being here, Mr. Jetter.
Thank you for your testimony.
Mr. Middleton.
STATEMENT OF MICHAEL MIDDLETON, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, COMMUNITY BANK OF TRI-COUNTY, WALDORF, MARYLAND, ON
BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Mr. Middleton. Chairman Tester, Ranking Member Johanns, my
name is Michael Middleton. I am the chairman and CEO of the
Community Bank of Tri-County in Waldorf, Maryland. We serve all
of southern Maryland and the northern neck of Virginia with 11
branches and assets just under $1 billion. I greatly appreciate
the opportunity to represent the ABA's views on the future of
the secondary mortgage market.
The ABA commends Senators Corker, Warner, Manchin, Tester,
Johanns, Hagan, Heitkamp, Heller, Kirk, and Moran on sponsoring
Senate bill 1217. We believe it prudently addresses the Federal
Government's role in the mortgage market and resolves the
longstanding conservatorship issues of Fannie Mae and Freddie
Mac.
This bipartisan legislation is a first positive step in
what is certain to be a long, long process in creating a
sustainable, rational, and limited role for the Federal
Government in supporting and regulating a healthy mortgage
market. It properly realigns a significant portion of the
residential mortgage process so that it is conducted by the
private sector. Under the implementation, it should serve as a
model for the other Government mortgage aggregators.
Now, as you are fully aware, the mortgage market touches
the lives of nearly every American, and, therefore, it is
imperative that reform be done without inflicting further harm
on the already fragile housing market and, most importantly,
does not inadvertently harm creditworthy Americans who wish to
own their home.
The bill follows principles that have long been advocated
by the ABA. It provides a set of incentives to strengthen
Government's involvement and to an appropriate and sustainable
level, while establishing the structure for a liquid private
market.
The legislation creates the Federal Mortgage Insurance
Corporation, or FMIC, which will serve as the public guarantor
of eligible mortgages, as well as the regulator of the issuers,
aggregators, and credit enhancers.
This approach addresses a number of key concerns with the
Government's role in the housing finance markets.
First, in the area of mortgage finance, the primary goal of
any Government-sponsored enterprise is to create stability and
liquidity to the market participants. Its role is to facilitate
the ability of the primary mortgage market to provide credit
for qualified borrowers.
Your proposed legislation achieves the goal by limiting the
scope of the FMIC guarantees a narrow set of well underwritten
loans as well as proper regulation of the market participants.
Second, by limiting the FMIC's scope, the bill creates an
environment for a strong and healthy private market to take
over the role of the GSEs. And by moving these activities to
the private sector and ensuring private entities take the first
loss position against guaranteed debt, the bill substantially
reduces taxpayer liability. It better addresses the mandate of
the Dodd-Frank Act for a lender to have skin in the game in a
manner that is certainly much more achievable for the community
banking sector.
In order to accomplish its goal of a more limited
Government role while ensuring that the mortgage markets
continue to function properly, a number of outstanding issues
need to be addressed. These include clearly refining the
capitalization requirements for those entities that are taking
up the role of securitization of the GSEs.
Also, the Committee should consider its proposed role as
the regulator of the Federal Home Loan Banks, yet keeping a
securitized subsidiary under its purview ensures that the
Federal Home Loan Bank System remains committed to its mission.
There are other areas where the bill can do more,
particularly in the role of Government and multifamily housing
market. We would also note to fully protect the taxpayers from
additional losses like those suffered by Fannie and Freddie,
the Farm Credit System, which continues to follow the model of
privatized gains and public losses, should be included in this
solution. Without similar reforms to the Farm Credit System, it
is only a matter of time until the taxpayers again are put at
risk.
In conclusion, due to the importance of the mortgage market
to our economy and our families across the country, any reform
must be deliberate. It must carefully address the many concerns
and interests of a wide range of participants and require
pragmatic negotiation, compromise, and cooperation.
There is much more work to be done. This bill is a very
well-considered and well-constructed formula on which to begin
the process, and thank you very much for allowing me to
testify, and I am happy to answer any questions.
Chairman Tester. Well, thank you for your testimony, Mr.
Middleton, and thank you all for being here today and for your
testimony.
I think we will just start with 7 minutes on the clock,
please, and I will just go down the line on these questions.
Would you or the institutions that you represent be able to
offer a 30-year fixed-rate mortgage without a Government
backstop?
Mr. Hartings. The 30-year fixed-rate mortgage is certainly
the most popular product that we--portfolio that we originate
today. So I think it would be very difficult to operate without
a credible 30-year mortgage product. Now, does it need a
Government backstop? It certainly needs something. You have to
ask the buyers of that security more than the seller. I am
selling it into Freddie. You have to ask the folks that are
actually buying that security. Would they buy that security
without a Government backstop?
Chairman Tester. Do you think they would?
Mr. Hartings. I think it would be difficult. I think the
Government backstop does give it a credible standard, which is
what, if you want to buy a security, you want to know a
credible standard there. So I think it is very important.
Chairman Tester. Mr. Hampel.
Mr. Hampel. We would, but very few. We could only make
enough fixed-rate loans that we could hold on our books, and so
once we had a sufficient portion of those, we would have to
sell them to someone else. And in that context, some form of a
Government backstop is guaranteed--is necessary.
You know, some have said that evidence from the jumbo
market suggests that a Government backstop is really not
necessary because we have nonfederally backed up jumbo
mortgages that existed up until the crisis. Of course, the
crisis did exist, and they dried up.
And, also, the primary risk with a jumbo mortgage is that
of prepayment, not of credit risk. What investors do not like
about jumbo mortgages is that they pay off too fast.
For a regular mortgage made to a regular person, you know,
a middle-income--lower-, moderate-, or upper-middle-income
person in the U.S., what is now conforming size, those are the
sorts of loans that, if they are for 30-year fixed-rate, they
are likely to stay on someone's books for a long, long time.
They, therefore, need some sort of credit enhancement for an
investor to be willing to buy that sort of security, especially
today. The loans being taken out now and for the next few years
are very likely to be staying on someone's books for a very
long time because of refinancing opportunities at lower rates
just are not going to be around anymore.
So we could make a little bit of them, but nowhere near the
amount that our members would want.
Chairman Tester. OK. Mr Jetter.
Mr. Jetter. Well, I think that our opinion probably would
not be too much different. Obviously the Home Loan Banks
themselves are not making these mortgages.
Chairman Tester. Right.
Mr. Jetter. And we have some programs through which our
members originate 30-year mortgages----
Chairman Tester. Correct.
Mr. Jetter. ----that we would take. But clearly, you know,
at all times and at what rates, I think those are real issues,
that there may be some 30-year mortgages made, but clearly it
would not be as appealing in the secondary market as what you
see today with a Government backstop.
Chairman Tester. Mr. Middleton.
Mr. Middleton. 30-year fixed-rate mortgages, at our bank we
stratify them. Our affordable housing product usually has
several layers, structured layers of nonprofits, and we
portfolio those. The fixed-rate jumbos, we price them for
quality and duration. Conforming, we usually sell into the
secondary market because it is an interest rate risk measure.
So we use sort of a broad spectrum, and we look at each
one, but our affordable housing products we like to keep on our
books at the bank.
Chairman Tester. OK. Let us go down the line of
affordability and price, and I will start with you, Mr.
Middleton, and we will go the other direction. If there was not
a guarantee, if there was not that Government backstop, what
would you anticipate would happen with both the pricing and the
availability of a 30-year fixed-rate?
Mr. Middleton. I think it would disrupt the market. I think
there are certain sectors that do require a Government backstop
at certain levels. I think the private sector has to come in
quickly if the Government discontinues any type of backstop. I
think the market pricing will change significantly because you
are going to price to risk. And I think it is going to be
harmful to so many middle Americans who need housing. And so I
think there is a role for it, a needed role for it.
Chairman Tester. Mr. Jetter.
Mr. Jetter. Well, again, we are not in the direct business
of originating, but our opinion would be similar, that in terms
of pricing it would assume the market would not be able to
absorb nearly what it does now, and the price would be higher
than what it is today.
Chairman Tester. Mr. Hampel.
Mr. Hampel. We definitely think the price would go up, and
it would likely go up more than the amount of an increase in
the price necessary to fully fund a private backstop ahead of
the Government backstop, so that the system envisioned in the
Corker-Warner bill actually is the best of both worlds. It has
a Government backstop, but it requires the private sector to
pay for that up front.
Chairman Tester. Good. Mr. Hartings.
Mr. Hartings. Yes, I think no doubt pricing goes up, but I
am probably a little bit more concerned with access because
banks like myself proposal are not going to take that interest
rate risk. Do I get out of that market? Who is going to fill in
that market in my rural area? And that is probably my bigger
concern about the loss of that.
Chairman Tester. OK. So let us talk about that just for a
second, Mr. Hartings. If you are not able to offer a 30-year
fixed-rate note because either you are priced out of the market
or you just decide it is just not worth it, there are too many
hassles, in a fully privatized market, and you are not able to
offer the 30-year fixed, what does that do to your customers?
Not only what does it do to your banks and what does it do the
customers that your banks service?
Mr. Hartings. It would somewhat destroy my business model.
You know, I mentioned in my testimony we are an 80-percent
mortgage lender, and half of that today goes to the secondary
market. And that is not unlike a lot of community banks out
there. That business model would--you would have to really re-
evaluate: What else can I do? What other risks should I be
taking out there? And it is probably not good risk. So I think
it would be very difficult.
The question, Senator, would be: Is that 30-year mortgage
available somewhere else? You know, if that is available at a
larger institution, I think you are going to see a lot of folks
pack up shop, I mean, because we have to have that access.
The bad news about that is we are packing it up in these
rural areas and these underserved areas and these areas that
really the bigger institutions probably do not want to be there
today.
Chairman Tester. OK. I am out of time, so I will go over to
Senator Johanns.
Senator Corker. Mr. Chairman, if I could, I have a preset
meeting. I know all--no, I am not going to ask any questions. I
just want to again thank the two of you for your leadership on
this issue, for focusing in particular on how it affects the
smaller institutions, and having witnesses in that are
knowledgeable and deal with this on a daily basis. I think all
too often we do not really talk enough with the people who are
out on the front lines taking care of these kinds of
activities. And, again, I want to thank you, and I hope that
this leads to something that is very constructive.
Chairman Tester. Well, thank you.
Senator Johanns. Mr. Chairman, thank you.
Just a quick follow-up on the Chairman's question, because
as each of you were going around, one of the things that
occurred to me about the 30-year mortgage and the clientele
that you are talking about is, you know, I remember when I
bought my first house. I probably would have loved to have paid
it off in 15 years but, quite honestly, did not have the
economic ability to do it. I was thrilled to get a 30-year
mortgage, absolutely ecstatic about it.
It just causes me to think that if we are not doing the
right thing for the 30-year mortgage, the people who are
hurting would be that first-time home buyer, that person that
maybe is stretching their income to get into that house. It is
truly the entry-level home buyer. Is that observation correct,
Mr. Hartings?
Mr. Hartings. I would say your observation is right on. I
never really thought about it, but, you know, we make 30-year
mortgages, we make 15-year mortgages, we make some 5-year
adjustables. But if you really look at the folks that are the
catalyst, the mortgage market, that first-time home buyer, they
are in that 30-year mortgage. They are stretching themselves
absolutely as far as they can go because that is what you have
to do to buy the first home. So I think that would really hurt
that part of the market.
Senator Johanns. Anyone else have any thoughts on that?
Mr. Hampel. Absolutely, Senator. The first-time home buyer,
you know, it sounds risky to ask the borrower to stretch
themselves to the limit, but if they do it reasonably in a
normal market, it is actually a very good thing for them
because they are freezing in their housing costs for several
years. But we could not--the 15-year mortgage is a really good
product for a person closer to retirement who is trying to
reduce their debt. It just does not work for a first-time home
buyer.
Mr. Middleton. If I may, Senator, it is not only the first-
time home buyer; it is the second-time home buyer, because of
the bubble, the inflation of the value of the house, this will
come down to a more normalized level so that you do not get
this huge flip-up. So it is the second generation or the
second-time home buyer that also would struggle significantly
to put down the 20 percent downpayment.
And, again, I know Jack's bank, our bank are many, many
decades old. We have the second and third generation of our
customers that they say, you know, go to our community bank and
handle them. This is not an anomaly. This is routine business
all day for us. We have about 25 percent of our portfolio in
residential mortgages.
Senator Johanns. OK, great.
Mr. Jetter, one of the things that has intrigued me about
what you folks do is your mortgage purchase program, which I
think has really worked well. If you could just take a minute
and offer an observation about how that program would work and
maybe interface with the legislation that we are talking about
today. Is this a fit?
Mr. Jetter. Well, I think it is. I think one of the things
that--yes, one of the things that you want to do in reforming,
I guess, the mortgage finance system is to have a variety of
avenues through which mortgages work, and we think that the
mortgage programs at the Home Loan Banks have been very
successful and one of our keys as we work with you and the
legislation is being able to continue those programs. They seem
to be especially appealing to our small community financial
institutions who find to a certain degree it is just much
easier to work with us in those programs than some of the
secondary market channels they might look at.
In addition, they are rewarded directly for taking skin in
the game, if you will, by being compensated for the credit
performance of those mortgages, and then it allows us to hold
those, again, the aggregate volume of that is probably not
going to be a lot larger than what it is today because it is a
balance sheet portfolio item for the Home Loan Banks. But for
our small community banks, it is very appealing, and we have
many, many of our members that are participating in it. And I
do not see anything in the legislation in terms of creating the
secondary market access that you are talking about with the
help of the Federal Home Loan Banks and other routes that would
necessarily be inconsistent at all with the mortgage programs.
Senator Johanns. One of the things I looked at when I first
looked at this proposed legislation was how does it fare
compared to what we have today. What we have today is Fannie
and Freddie, and I guess we know the problems there, because we
saw them firsthand. When the market collapsed, taxpayers became
responsible, in effect, for a massive amount of debt.
We are talking about the backstop today, but it occurs to
me that if this would have been in place a few years ago when
the market collapsed, we would have had a firewall in front of
the taxpayers that in all likelihood would have been sufficient
to avoid exposure for them.
I was just curious as to whether any of you had looked at
that aspect of the bill in terms of its merits versus the
current system. Anybody want to take a swipe at that?
Mr. Middleton. If I may, Senator, the current system was
gamed by the GSEs, unfortunately. The system that you are
proposing should have the precautions and the structure that
would eliminate the ability to game the system. And I think you
are correct in your observation. It would be an entirely
different world had we not gone the path we went.
Mr. Hampel. Senator, I think the current system has several
design flaws which were exposed by the crisis. They were not
actually designed. They just evolved and turned out that way.
And now with the benefit of 20/20 hindsight, this proposal
addresses all those design flaws, and so it would, I think,
dramatically reduced the probability of something like this
happening again.
Senator Johanns. Go ahead.
Mr. Hartings. Senator, if I could just say, you know, I
think you are right, hindsight--I am not going to sit here and
tell you that Fannie and Freddie are not broke. But I really
think it is the disconnect of that mortgage process. One of the
reasons community banks survive through this and still have
sold Fannie and Freddie good product, we originate and service
the loans we bring on their books, and really that is probably
our best quality portfolio, even through all of this problem.
So I think if you are going to look at hindsight, you have
to look at that disconnect and say: When did it get
disconnected? And how do you keep that connection together?
Senator Johanns. Thank you, Mr. Chairman.
Chairman Tester. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
As we consider the reform of mortgage finance, we have to
think about the role that the Federal home loan banks will
play. The FHLBs increase liquidity in the system. They are
often used by the small financial institutions, as you have
pointed out, those who have limited access to capital markets.
And while the FHLBs do not require taxpayer dollars, as you
rightly point out, and they do not have an explicit Government
guarantee, they have a line of credit with the U.S. Treasury
and are widely considered to have an implicit guarantee.
So last month, I wrote to FHFA Director DeMarco asking
about a multi-billion-dollar line of credit with Sallie Mae, a
Fortune 500 company and the biggest private student lender in
the country and this line of credit they have with the FHLB.
And right now Fannie Mae is paying the FHLB one-quarter of 1
percent interest and then turning around and making student
loans at a rate of 25 times or more higher.
Now, I understand that many people understand that the
FHLB's implicit guarantee and the extraordinarily cheap access
to capital that results helps support mortgages and helps
support community projects, but I do not think many people know
that it is helping support the country's biggest private
student loan outfit, Sallie Mae.
So my question is, Mr. Jetter, do you have any thoughts on
why the FHLBs are in the business of providing loans to Sallie
Mae instead of focusing on local institutions that need access
to that capital?
Mr. Jetter. Senator, I understood you might be asking a
question on this, and so I have taken a look at it a little.
Clearly the institution you reference is not a member of my
bank, and so I do not have any independent or personal
knowledge of their activities.
I do know that we do accept Government-guaranteed student
loans as collateral, that in the past or in the financial
crisis there were severe issues in terms of liquidity in that
market, and Congress encouraged the banks--I think there was a
House bill that went through, a sense of the Congress bill, as
well as a number of Senators that encouraged the Home Loan
Banks to look very hard at accepting guaranteed student loans
as collateral in order to provide more liquidity to the system.
And then our regulator worked with us to encourage us to accept
Government-guaranteed student loans as collateral.
And in terms of our collateral practices, we have members
both large and small, we have insurance companies, credit
unions, banks, and thrifts. We adopt collateral rules in terms
of what we will apply to the lending that goes on there really
across the board. We do not----
Senator Warren. Mr. Jetter, let me just stop you there to
make sure that I am understanding this. I actually looked at
your Web site, and the Web site for the FHLB says, and I will
quote: ``The purpose of the Federal Home Loan Banks is to be a
strong and reliable source of funds for local lenders to
finance housing, jobs, and economic growth.''
Now, Sallie Mae is a Fortune 500 company worth billions of
dollars. It is not a local business. It is not in the business
of doing real estate loans, helping people buy homes. It is not
in a local community. And so I am trying to understand how it
is that Sallie Mae has been able to access capital from the
Federal Home Loan Bank Boards at one-quarter of 1 percent.
Mr. Jetter. Well, as I explained, we have--our membership
rules are defined by Congress as to who is eligible to become a
member of the system. And we make our advances available based
on collateral rules that are the same for all the members. So
we do not distinguish to pick a particular member and say we do
not believe that that is acceptable for you because of the
institution you are, but we would think it is acceptable for
another institution. We actually have a mandate to treat all
our members fairly and equally without prejudice.
Senator Warren. So actually let me ask you about that on
treating everybody fairly and equally. Are the community banks
and credit unions borrowing for one-quarter of 1 percent?
Mr. Jetter. It depends on what--they may be borrowing for
substantially less, depending on what--it has to do with the
term and type of advance that they are looking at. But short-
term rates, if that is what you are looking at, are much less
than that for most of our members. So I am not sure--as I said,
I am not familiar with the type of credit that that institution
has. I cannot--but I would assume, generally speaking for our
bank, that those rates would be available to all our members or
would be very comparable.
Senator Warren. Maybe I should ask this the other way. Mr.
Hampel, I thought your testimony was very interesting about the
Federal home loan banks and the importance they play in
providing capital to small institutions. So let me ask it the
other way. Is there anything you think we should do or think
about going forward to make sure that the Federal home loan
banks really are focused on lending to community institutions?
Mr. Hampel. Well, I am familiar with any changes in the
charter of the home loan banks during the crisis. You know, if
Congress made changes in whom the Federal home loans banks were
supposed to serve during the financial crisis, I suspect the
Federal home loan banks would have to meet those needs.
What credit unions use the Federal home loan bank for is
not such short-term borrowing, because we have plenty of short-
term funds from our members; we use it to hedge long-term
interest rate risk. So we will borrow longer term. We would
love to pay a quarter of a percent, but, of course, we are
going for a longer term. We borrow for a much longer term in
order to use those funds to make long-term loans, put long-term
loans on our books. And there are limits to the extent we can
do that because of capital requirements that credit unions
face.
Senator Warren. I understand. And, Mr. Hartings, would you
like to add anything?
Mr. Hartings. Yes, I think the Federal Home Loan Bank of
Cincinnati, who we deal with, does an excellent job with her
MPP program. We really do not use a lot of the borrowing from
that, so I am not really probably here to tell you rates to
help you out with that, Senator.
Senator Warren. OK. Fair enough. I just think that as we
think about mortgage finance reform and the role of the Federal
home loan banks, I am very impressed by what you say on your
Web site. But we really want to think about whether or not the
Federal home loan banks and the implicit Government guarantee
that backs that up and permits it to have money at such a low
rate is focused on our community banks and credit unions and on
helping people buy homes and not in other areas. So thank you,
Mr. Jetter.
Thank you, Mr. Chairman.
Chairman Tester. Senator Heitkamp.
Senator Heitkamp. Just a quick comment, and not to belabor
this point, but I do want to kind of go on record saying we
need to be careful with one-size-fits-all, because the bank
that the Bank of North Dakota deals with, because of their
relationship, has been able to offer some very interesting and
low-cost student products. And so we have a great opportunity
in North Dakota to partner up, and the Bank of North Dakota has
been extraordinarily grateful, and I think the students in
North Dakota have been grateful for that relationship.
So I do not know about the Sallie Mae issues, but I do know
that we need to be careful because the charter of the Bank of
North Dakota is very similar to yours, which is economic
development and community development, and we think that
includes some development of education needs of students and
have always interpreted the charter of the bank that way.
I want to get back to maybe the first question that Senator
Tester asked, which is, without an explicit Federal guarantee,
will we have a 30-year mortgage market? And, you know, some of
you were a little clearer than others. Some of you dodged
pretty good in the response. But I think it is so important
that your organizations think long and hard about this and you
think, instead of, you know, kind of looking at what is going
to give you the maximum amount of positioning as we move
forward with this, take a look at what that really means,
because I think when we went and negotiated this bill and I
came in on the tail end of it, I am convinced that, without
that, we will price the 30-year mortgage away from
affordability for first-time and second-time and maybe even
third-time homeowners. At a time when we have increasing
homeowner costs in this country, a bigger and bigger percentage
of our income is being used to pay for our housing.
And, you know, I am a big believer that no matter what
happens, if we saw something like this again, even though there
is not an explicit, there would be an implicit. And so we need
to be proactive in that direction.
And so I really encourage you--I do not mean to sound too
preachy here, but I really encourage you to send a clear
message about what it is that your institutions need, both your
private institutions that you represent today and the
organizations that you represent today. Because without a clear
message, that could, in fact, result in a product that will not
accomplish what you know needs to be accomplished for your
institutions but also for the American people.
So, with that said, my question is actually for you, Mr.
Jetter. You mentioned the regulatory environment for small
community banks and a lot of our smaller institutions, and you
said some has been done. This is an issue that I think every
person on this Committee has raised one time or the other with
the regulators. And they keep assuring us they are fixing the
problem, that all is well, it is coming, do not worry, we are
not going to regulate the small community banks out of the
market.
Now, you did mention that you were not convinced that the
regulatory help is coming, and you said you have some
suggestions on other things that could be done. And I am
curious about what you think those other things are that could
be done and should be done right now by the regulators that are
not being considered.
Mr. Jetter. Well, let me say first of all that I am sure
the other folks on this panel are probably better suited to
actually address the specifics of that. What I am really
communicating is what my members are telling me in terms of the
business and what we are getting back in terms of the survey
results that we conducted. In talking to them, I know that in
some of the new rules that came out on Basel there were some
adjustments, but I guess my impression--then I will let these
other folks address it, if that is all right with you. My
impression is that it is just amazing the compliance,
additional compliance burden that is falling. And it is
particularly falling on a group that probably follows pretty
prudent lending on their own if there were no rules. It is
interesting when we go out and try to talk to a member
institution about thinking about participating in the MPF
program where they would credit-enhance their mortgages, and
you ask them, you know, ``What risk are you taking and what
kind of losses have you had?'' And for small community banks,
the routine answer is, ``Well, we have never had a loss because
we make prudent loans that people are going to pay back, and we
work with them if they have problems.'' And so it is quite a
bit different.
But I would defer to the others on the panel who probably
have a better understanding of specifics.
Senator Heitkamp. Just not to belabor the point, but
obviously you did do a survey, and if there were specifics
within that survey that you would like to share with me or the
Committee, I know that we would be interested in seeing those.
Mr. Jetter. We would be happy to get those to you.
Senator Heitkamp. Thank you. Mr. Hampel.
Mr. Hampel. Senator, first of all, to your first question,
the 30-year fixed-rate mortgage, as we know it, would
absolutely not exist with some form of a Government guarantee.
Senator Heitkamp. Thank you.
Mr. Hampel. A few people would be able to get it from a few
very large institutions that would survive in the market, but
to normal people it just would not be available. And that is
the first thing.
The second thing, you have said several times one size fits
all. That is the problem with the new regulations that have
come out of the crisis of the last few years. Because some
players in the market, not represented at this table, did not
behave very well, Congress felt the need to create some sort of
basic rules, default rules, that if everyone follows those,
they know everything will be OK. The trouble is what we do as
small institutions closer to our members, closer to their
customers, we are able to make loans on the basis of not having
to fit all of the--the QM rule is a perfect example of
requiring a one-size-fits-all solution, and the problem is it
excludes an awful lot of qualified borrowers simply because it
has sort of default lines everywhere and a much more
complicated loan decision than a small local lender is able to
deal with.
Senator Heitkamp. And what happens to relationship banking?
Mr. Hampel. It goes away. It is mandated----
Senator Heitkamp. It is no longer a relationship.
Mr. Hampel. Right. It is a checklist.
Senator Heitkamp. Formula.
Mr. Middleton. Senator, if I can opine on that, I
appreciate the question. I think we can turn your question
around. What impact will it have on a 30-year mortgage? It
would definitely ensure its viability. Is that clear?
Senator Heitkamp. The current----
Mr. Middleton. A backstop or the FMIC I think, in my
opinion, would ensure the viability of the 30-year product.
With respect to the regulatory issue--I know Jack and I
talk about this often--it is the number one concern. We have
not the regulations yet. We are in a Catch-22 on CRA now. We
will be put into that position by the QM, and the non-QMs. We
have not seen how we will handle non-QRMs because basically
that is our portfolio. It is the second generation, dividing up
a farm of 30 acres apiece. It does not fit. It is the pieces
that--that is our portfolio. Well underwritten, always
performed, no losses.
So we have not seen the impact. You start connecting all
the dots, and you will see just how long this line is, and it
is all coming at us at once.
As a billion-dollar bank, we are extremely efficient in
compliance. We work very hard for that. But we are sort of in
awe at what appears to be approaching us, and we are constantly
saying, ``How can our business models survive with this
overwhelming tsunami of regulatory process?''
Mr. Hartings. Just a few comments. You know, as a banker,
we always say it is pile-on regulation. I like to point to one,
but it is this big pile of regulations that is kind of burying
us right now. But we have been talking about QM, and a good
example of QM is portfolio lending.
I am asked the question once in a while: Will you make a
non-QM loan? Well, right now I am making them all the time. But
when QM goes into place, I may not after that.
So these are customers--and I am one of those banks that
have very low losses. My delinquency is well below the national
average. But yet still I am a major lender in my field.
So that is the regulation I do not want to see burden
community banks because it hurts customers. At the end of the
day, you know, why are we so good at what we do? Because I do
not have to look at my regulator. I just have to look at my
neighbor and probably my brother-in-law, and they are the folks
that we lend to in our area. And I cannot do anything with them
because they all know where I live. You know, and so we take
care of ourselves. Just keep that in mind.
Senator Heitkamp. Thank you.
Chairman Tester. We have got a vote here very shortly, but
I do have a couple questions, if I might. And these are for
everybody but Mr. Jetter, OK?
[Laughter.]
Chairman Tester. There are some proposals out there that
would--and I am sure you are all familiar with the single
securitization platform that FHFA is working on. There are some
proposals out there to outsource that single securitization
platform to private entities. What would the impact of that be?
Mr. Hartings. I think the devil is always in the details,
Senator, so I am not sure until that gets maybe progressed a
little longer to really comment from the banking side on what
the impact may be.
Chairman Tester. Let me flesh it out a little more for you,
then. Assuming that they do outsource it, I would assume that
you are not going to be a bank that has access to be able to
buy that securitization platform.
Mr. Hartings. That would be a real fair assumption.
Chairman Tester. So it goes to one of the big guys. What is
the impact going to be?
Mr. Hartings. Again, it looks at maybe taking another piece
of our business model and destroying it. And how do we continue
to operate if we have less and less of that business model
there?
Chairman Tester. Mr. Hampel.
Mr. Hampel. That would raise major concerns about fair and
equal access to that securitization platform, probably
insurmountable, but major concerns.
Chairman Tester. OK. Mr. Middleton.
Mr. Middleton. It would take a rather large platform to do
what you are saying.
Chairman Tester. That is correct.
Mr. Middleton. So we think it would be greatly out of the
reach of most community banks or regional banks. I think what
you want to avoid is a monopoly duopoly. So that would be my
position.
Chairman Tester. OK. So in all fairness, Mr. Jetter, this
next question is for you. In a housing finance system without
Fannie and Freddie or any Government backstop, what would the
impact be of a proposal that allowed the Federal home loan
banks to aggregate, as you do now, but not securitize mortgages
on behalf of your members?
Mr. Jetter. So we could aggregate, but ultimately we would
have to find a buyer of those securities, who then would be
issuing them on their own. I guess in the example that you
said, I imagine that would be the large institutions would be
who we would need to deal with. But ultimately, you know, on
what terms it is difficult to anticipate.
Chairman Tester. Would you anticipate it would increase
interest rates?
Mr. Jetter. If there was not a Government backstop, I am
assuming that that would increase interest rates. It is hard to
understand how it would not.
Chairman Tester. OK. All right. First of all, I want to
thank you all for your testimony and thank you for your
patience in answering the questions. There are a bunch more
questions to ask of you guys simply because you are the folks
that really hit it where the rubber hits the road.
I do want to go back to something that Senator Heitkamp
said, and I think most of the people behind you understand
this, and I think you do, too. And, that is, you need to be
very, very clear as we move forward so you are not aced out of
this system. There are those that want to do more consolidation
in banking, and I think this is one good way to try to get more
consolidation banking.
By the way, I am not one of those. I think we need more
competition in the marketplace, and we need more guys out there
on the ground creating more competition to move it forward.
So I would just say stay in touch, make sure the message is
clear, because, quite frankly, I think coming from a State like
Montana, as I said in my opening, if you guys are not able to
do business, it has some pretty major impacts in my neck of the
woods.
So I just want to thank you once again for your testimony.
I think the hearing has underscored the importance of ensuring
that community-based institutions have access to that secondary
market, and it has given us some food for thought as we move
forward with housing finance reform in this Committee.
The hearing record will remain open for 7 days for any
additional comments or any questions that might be submitted
for the record.
Once again, thank you for your time, and this hearing is
adjourned.
[Whereupon, at 4:49 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF SANDRA THOMPSON
Deputy Director, Division of Housing Mission and Goals, Federal Housing
Finance Agency
July 23, 2013
Chairman Tester, Ranking Member Johanns, and Members of the
Committee, my name is Sandra Thompson and I am the Deputy Director for
Housing Mission and Goals for the Federal Housing Finance Agency
(FHFA). Thank you for the opportunity to appear before you today to
discuss the important role that community-based financial institutions
play in the Nation's housing finance system.
As you know, FHFA regulates Fannie Mae, Freddie Mac (the
Enterprises), and the 12 Federal Home Loan Banks. Combined, these
institutions support over $5.5 trillion in mortgage assets nationwide.
FHFA has also served as the conservator for Fannie Mae and Freddie Mac
for close to 5 years now. We take this responsibility very seriously
and have focused on our statutory mandate to ensure the Enterprises
operate in a safe and sound manner while preserving and conserving
their assets.
Before joining FHFA in March, 2013, I spent 23 years with the
Federal Deposit Insurance Corporation (FDIC), most recently as Director
of the Division of Risk Management Supervision. In this capacity, I was
responsible for all aspects of FDIC's risk management examination
activities for approximately 4,500 FDIC-supervised institutions
nationwide, overseeing a distributed workforce of employees deployed in
six regional offices and 84 field offices across the country.
At the FDIC, I was involved in several outreach efforts designed to
understand the vital role that community bankers play not only in their
local communities, but also in the overall economy. Engaging in
regional roundtable discussions and other forums, provided valuable
insight from community bankers, their trade organizations and State
banking commissioners about the challenges and opportunities they
encounter in the banking industry.
In a similar manner, FHFA is committed to undertaking outreach
efforts to better understand the activities of community-based
financial institutions in the housing finance industry. As discussed
later in my testimony, we are meeting with community bankers, credit
unions, mortgage bankers and trade associations to help us better
understand their access to and interaction with the secondary mortgage
markets. Since joining FHFA I have participated in one meeting so far,
and what is clear is--without access to liquidity, many community-based
lenders could not be active in the primary market.
In my testimony today, I would like to make the following points:
Community-based financial institutions play an important
role in the provision of housing credit;
During conservatorship, FHFA has taken meaningful steps to
ensure community-based lenders have equal access to the
secondary market; and
It is vital to ensure that community-based institutions
have the ability to fully participate in the housing finance
system of the future.
The Role of Community-Based Lenders
Community-based lenders play an important role in the provision of
housing credit. In addition to broadly supporting the financial
services needs of their customer base, this role is particularly
important for certain areas of the country, for certain types of
borrowers, and for certain types of mortgage products.
There is no generally accepted definition of ``small lender'' or
``community bank'' within the industry or between the Enterprises.
Federal bank regulators generally define them as institutions with
under $1 billion in assets, while employing various exceptions to this
definition. The Enterprises generally define community-based lenders as
lenders originating less than $1 billion of mortgages per year
regardless of the institution's total asset size.
Despite the fact that community-based lenders account for a small
percent of the residential mortgage lending market, they have a vital
role in serving rural and underserved markets nationally. Most
importantly, community-based lenders are committed to the people and
the places where they lend money. They are a stabilizing force in their
local markets and generally engage in responsible lending. Community-
based lenders have a long history of making sound mortgage loans,
choosing not to originate the kinds of abusive and predatory loans that
contributed to the housing and financial crisis. This type of
responsible lending helps local economies thrive.
Community-based lenders are particularly important in smaller and
rural communities where lending can be challenging. Standard
documentation that aggregators or large lenders require from mortgage
originators before accepting loans for securitization may be more
difficult to produce in smaller and rural communities. For example,
appraisals for collateral located in rural areas and documentation for
self-employed and seasonally employed borrowers may not be acceptable
to a larger lender and therefore may not be acceptable for secondary
market participation, resulting in many small lenders retaining loans
in their portfolios. Having lenders active and involved in smaller
markets can be the difference in local borrowers having access to
single family home financing.
For many community-based lenders, participation in the primary
mortgage market is predicated on their ability to access the secondary
market. This requires an established relationship with a secondary
market participant. Historically, these lenders have maintained
relationships with Fannie Mae and Freddie Mac, the Federal Home Loan
Banks, Government National Mortgage Association (GNMA or ``Ginnie
Mae''), private label securitizers, and correspondent banks.
Since the financial crisis, private label securitizers have been
almost entirely absent from the single family market, while a number of
correspondent banks have either curtailed or abandoned that business.
Today, a large number of community-based lenders continue to depend on
relationships with Fannie Mae, Freddie Mac and/or the Federal Home Loan
Banks for access to the secondary mortgage market. They also interact
with Ginnie Mae when originating FHA and VA loans.
Also, some community-based lenders that are members of a Federal
Home Loan Bank are opting to sell their loans directly through the
Federal Home Loan Bank System's Acquired Member Asset program. In some
cases, the Federal Home Loan Bank buys loans outright for its
portfolio, but increasingly the Federal Home Loan Bank acts as an
aggregator for small lenders, buying loans from members and then
selling them to Fannie Mae.
The Chicago Federal Home Loan Bank sponsors and administers the
Mortgage ``MPF Xtra'' program, where whole loans are aggregated
directly from members and sold to Fannie Mae for securitization. The
``MPF Xtra'' program is the largest seller using cash execution at
Fannie Mae, delivering over $6.9billion in residential mortgage whole
loans during 2012. Members of seven different Federal Home Loan Banks,
including Chicago, utilize this cash execution in the secondary market.
Fannie Mae and Freddie Mac offer mortgage originators two options
for delivering loans for securitization. Mortgage originators may
either sell loans for cash through Freddie Mac's ``cash window'' or
Fannie Mae's ``whole loan conduit'' or they may exchange loans for
mortgage-backed securities in an MBS swap transaction. In this
testimony we use the term cash window to refer to both Enterprises'
mechanisms for delivering loans for cash. Through the cash window, the
Enterprises purchase loans that meet their standards directly from
lenders, packaging them into securities and selling the securities to
the market. The cash window is a mechanism designed to enhance the
liquidity of the lender.
Smaller lenders who do not have the scale to participate in the
guarantor business generally use the cash window, although lenders of
all sizes sell loans through this path. Fannie Mae and Freddie Mac each
have an existing selling and/or servicing customer relationship with
over 1,000 community-based lenders. Some institutions have
relationships with both Enterprises.
Across all entities conducting business with the Enterprises--
including banks, credit unions and mortgage bankers--cash window
volumes at Fannie Mae tripled from 2007 to 2012 and doubled at Freddie
Mac over the same period. In 2012, over 2,200 customers sold $286
billion in loans for cash (one loan at a time or in bulk) representing
25 percent of Fannie Mae's purchase volumes and 19 percent of Freddie
Mac's purchase volumes.
Over the past 5 years, the total volume of loans delivered to the
Enterprises by community-based lenders has increased substantially. For
example, in 2007, only 3.6 percent of loans delivered to Freddie Mac
came from outside the top 100 lenders. In 2012, this increased to 15.1
percent of all loans at Freddie Mac, more than a fourfold increase.
From 2007 to 2012, the number of community-based lenders at both
Enterprises increased by 18 percent.
During Conservatorship, FHFA Has Taken Meaningful Steps to Level the
Playing Field
FHFA has undertaken initiatives that maintain and help ensure
community-based lenders have equal access to the secondary market. Last
fall, FHFA mandated an increase in guarantee fees for mortgage-backed
security (MBS) swap transactions relative to those charged for cash
window transactions. Since large lenders tend to engage in swap
transactions and small lenders tend to engage in cash transactions, the
intended effect of these changes was to level the playing field between
small and large lenders. This action followed price adjustments earlier
in the conservatorships that had already significantly reduced the
substantial pricing advantages large customers of the Enterprises
historically used. Data provided to FHFA by both Enterprises indicates
this objective has been achieved.
FHFA has also directed both Enterprises to align and streamline
their servicing standards, and has encouraged consistent customer
access and management through standard eligibility and counterparty
requirements. In this regard, FHFA has discouraged the implementation
of new minimum customer annual activity thresholds for selling,
servicing, and utilizing the Enterprises' automated underwriting
systems. Freddie Mac's proposed ``low activity'' fee of $7,500 would
have created a significant financial burden on smaller community-based
lenders and discouraged their ability to obtain liquidity in the
secondary mortgage market. With FHFA encouragement, the fee was changed
and now there is only a minimal fee for community-based lenders who
have not delivered a loan within the past 3 years. This fee allows
small lenders to maintain their approved seller status, which is
important because it keeps the option open to make future sales to the
Enterprise.
It Is Vital To Ensure That Community-Based Lenders Can Participate in
the Future Housing Finance System
FHFA believes it is critical to include community-based lenders as
we take steps to prepare the foundation for a new housing finance
system. There should not be a significant difference in how large and
small lenders are treated when securitizing residential mortgage loans.
We are developing and executing alignment activities between the
Enterprises, by establishing common data standards and uniform legal
and contractual documents. Standardization of both data requirements
and contractual language necessary for securitization will go a long
way toward leveling the playing field between large and small
securitizers.
In 2010, FHFA directed the Enterprises to initiate, develop and
deploy a Uniform Mortgage Data Program (UMDP). This effort is designed
to capture consistent and accurate mortgage data, improve loan quality,
and enhance risk management capabilities.
A solid foundation of data standards is crucial to the future of
housing finance and will allow lenders of all sizes to participate in
the marketplace on equal footing. Developing an industry standard makes
it far easier and cheaper for all lenders, including community-based
ones, to acquire the necessary technology from a third-party vendor and
apply it within their institution.
A component of UMDP that is currently underway is the Uniform
Mortgage Servicing Data (UMSD) project. UMSD will expand and
standardize the servicing dataset used for managing performing and
nonperforming loans and for disclosure reporting. FHFA and the
Enterprises are working with the industry to define the complete UMSD
dataset requirements at this time; full build-out and industry adoption
is expected to take several years. FHFA and the Enterprises are working
with the Mortgage Industry Standards Maintenance Organization (MISMO)
to ensure that UMSD data points are accurately defined and specified
for industry adoption. We are also working with other Agencies and the
Enterprises to standardize origination data collected through the new
Consumer Financial Protection Bureau (CFPB) Closing Disclosure Form,
which integrates parts of the HUD-1 and the final Truth in Lending
forms. The Enterprises are also working to expand and reorganize the
data collected on the Uniform Residential Loan Application (URLA).
FHFA has also made the Enterprises' development of the technical
and functional capabilities of the Common Securitization Platform (CSP)
a key component of the strategic goal to build a new infrastructure for
the secondary mortgage market. The Common Securitization Platform is
the technological means for packaging mortgages into a variety of
security structures. It also provides the operational support to
process and track the payments from borrowers to investors. Initially,
the platform will be the infrastructure the Enterprises use for data
validation, issuance, disclosure, master servicing, and bond
administration for their securities. This framework will connect
capital markets investors to homeowners and is being developed with the
potential to be used by other issuers in the future in a housing
finance system with or without a Government guarantee. It is also
vitally important that all lenders, large and small, have access to the
Common Securitization Platform.
Recently, FHFA in conjunction with the American Bankers Association
(ABA), hosted a meeting with community bankers with operations in towns
with populations as low as 11,000 from seven States. These bankers have
relationships with their Federal Home Loan Bank, and with either Fannie
Mae or Freddie Mac. The discussion centered on the role these banks
play in serving primarily rural, small, and potentially underserved
communities. The asset size of these institutions ranged from $233
million to $508 million. In 2012, they originated between $35 million
to $166 million in residential mortgage loans.
This was the first event in a larger outreach effort FHFA is
undertaking to engage community-based lenders. We plan to meet with
more groups of community-based financial institutions over the next
month, leveraging the expertise of their respective industry trade
groups, including the Independent Community Bankers Association (ICBA),
the National Association of Federal Credit Unions (NAFCU), Credit Union
National Association (CUNA), the Mortgage Bankers Association (MBA),
and multiple State Bankers Associations. The meeting with the ICBA
member banks will be held in Chicago on August 12th. Similar to the
initial meeting with the ABA members, we intend to raise and address
the following:
How to maintain and maximize community-based lender
relationships with Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks;
How to ensure community-based lenders are on equal footing
with larger competitors; and,
The challenges and opportunities community-based lenders
face, particularly in either rural or underserved areas.
After we have met with community-based lenders, we will review
their feedback and consider changes to Enterprise processes and
policies that would address issues of concern and provide benefit to
smaller institutions.
The Federal Home Loan Banks may also have an opportunity to expand
their role. This is especially important as the aggregation role for
nonjumbo mortgage loans provided by the private label securitization
model has largely evaporated. As Acting Director DeMarco recently
commented at the 2013 Federal Home Loan Banks Directors Conference,
there is opportunity for the Federal Home Loan Bank system to expand
upon the limited loan aggregation role they are playing today with the
Mortgage Partnership Finance (MPF) programs. With the existing
cooperative structure, the Federal Home Loan Banks could offer
liquidity with securities markets levels of execution, aggregating
nonhomogenous mortgage loans from members that would be funded with
capital from global sources. As we consider a future secondary market
with a reduced Government guarantor role, providing members with
aggregation services to access various types of secondary market
execution might become an important opportunity for the Federal Home
Loan Banks.
Conclusion
As we move closer to reforming our Nation's housing finance system,
it is important to ensure that community-based lenders are able to
fully participate in the new system. In many respects, this means
ensuring equal access to the secondary mortgage market, since for many
community-based lenders the ability to be active in the primary market
is based on an ability to access the secondary market. As conservator,
FHFA has taken several steps to level the playing field for community-
based lenders. We believe ensuring their participation in the future
system is in the public interest and we stand ready to work with this
Committee to see this goal reached. Thank you, and I am pleased to
answer any questions you may have.
______
PREPARED STATEMENT OF JACK A. HARTINGS
President and Chief Executive Officer, The Peoples Bank Company,
Coldwater, Ohio, on behalf of the Independent Community Bankers of
America
July 23, 2013
Chairman Tester, Ranking Member Johanns, Members of the
Subcommittee, I am Jack Hartings, President and CEO of The Peoples Bank
Company and Vice Chairman of the Independent Community Bankers of
America. The Peoples Bank Company is a $400 million asset bank in
Coldwater, Ohio. I am pleased to represent community bankers and ICBA's
nearly 5,000 members at this important hearing on ``Creating a Housing
Finance System Built to Last: Ensuring Access for Community
Institutions''. We are grateful for your recognition of the critical
importance of preserving community bank access in any reforms to the
housing finance system. It is essential to borrowers and the broader
economy that the details of any reform are done right. We sincerely
appreciate the opportunity we've been given to work with members of
this Committee to craft housing finance reform legislation. We look
forward to providing ongoing input on the impact of reform on community
banks and their customers.
Community Banks and the Mortgage Market
Community bank mortgage lending is vital to the strength and
breadth of the housing market recovery. Community banks represent
approximately 20 percent of the mortgage market, but more importantly,
our mortgage lending is often concentrated in the rural areas and small
towns of this country, which are not effectively served by large banks.
For many rural and small town borrowers, a community bank loan is the
only mortgage option.
A vibrant community banking sector makes mortgage markets
everywhere more competitive, and fosters competitive interest rates and
fees, better customer service, and more product choice. The housing
market is best served by a large and geographically dispersed number of
lenders. Five years after the financial crisis, an already concentrated
mortgage market has become yet more dangerously concentrated. We must
promote beneficial competition and avoid further consolidation and
concentration of the mortgage lending industry.
The Peoples Bank Company has been in business for 108 years. We
survived the Great Depression and numerous recessions before and
since--as have many other ICBA member banks--by practicing
conservative, commonsense lending. We make sure loans are affordable
for our customers and they have the ability to repay. Loans are
underwritten based on sound practices using our personal knowledge of
borrowers and their circumstances.
Fair Access to the Secondary Market
Secondary market sales are a significant line of business for many
community banks. According to a recent survey, nearly 30 percent of
community bank respondents sell half or more of the mortgages they
originate into the secondary market. \1\ When community banks sell
their well-underwritten loans into the secondary market, they help to
stabilize and support that market. Community bank loans sold to Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) are
underwritten as though they were to be held in the bank's portfolio.
---------------------------------------------------------------------------
\1\ ICBA Mortgage Lending Survey. September 2012.
---------------------------------------------------------------------------
While community banks choose to hold many of their loans in
portfolio, it is critical for them to have robust secondary market
access in order to support lending demand with their balance sheets.
For example, I have a portfolio of 867 loans with a balance of $81
million we originated and sold to Freddie Mac. Loan sales to Freddie
Mac allow me to support the broad lending needs in my community,
particularly with fixed-rate loans demanded by my customers. As a
community bank, it is not feasible for me to use derivatives to offset
the interest rate risk that comes with fixed-rate lending. Secondary
market sales eliminate this risk. The ability to sell single loans for
cash, not securities, is critical to my bank because I don't have the
lending volume to aggregate loans before transferring them to Freddie
Mac. In addition, I have the assurance that Freddie Mac won't
appropriate data, from the loans sold, to solicit my customers with
other banking products.
Even those community banks that hold nearly all of their loans in
portfolio need to have the option of selling loans in order to meet
customer demand for long-term fixed-rate loans. Meeting this customer
demand is vital to retaining other lending opportunities and preserving
the relationship banking model.
While many community banks remain well capitalized following the
financial crisis, others are being forced by their regulators to raise
new capital, even above minimum levels. With the private capital
markets still largely frozen for small and midsized banks, some are
being forced to contract their lending in order to raise their capital
ratios. In this environment, the capital option provided by the
secondary markets is especially important. Selling mortgage loans into
the secondary market frees up capital for more residential mortgages or
other types of lending, such as commercial and small business, which
support economic growth in our communities.
Many community banks would like to sell more loans but for the
challenge of identifying ``comparable'' sales, as required by Fannie
Mae and Freddie Mac, in rural markets where properties have unique
characteristics such as large plots of land. The nearest comparable may
be 60 miles away.
In addition to selling mortgage loans to Freddie Mac, my bank
participates in the Mortgage Purchase Program (MPP) through the Federal
Home Loan Bank of Cincinnati. While our loan sales to the MPP--33
serviced loans with an outstanding balance of $4.4 million--are only a
fraction of our sales to Freddie Mac, we're pleased to have this
alternative secondary market access. The Federal Home Loan Banks
(FHLBs) are a critical source of liquidity to support community bank
mortgage lending. The FHLBs were particularly important during the
financial crisis when they continued to provide advances to their
members without disruption while other segments of the capital markets
ceased to function. The FHLBs must remain a healthy, reliable source of
funding.
Key Features of a Successful Secondary Market
The stakes involved in getting housing-finance market policies
right have never been higher. Housing and household operations make up
20 percent of our economy and thousands of jobs are at stake.
With regard to the secondary market, if the terms are not right,
the secondary market could be an impractical or unattractive option for
community banks. Below are some of the key features community banks
require in a first-rate secondary market.
Equal access. To be sustainable and robust, a secondary market must
be impartial and provide equitable access and pricing to all lenders
regardless of their size or lending volume. Without the appropriate
structure, a secondary market entity will have a strong incentive to
offer favorable terms to only the largest lenders. Such an outcome
would drive further industry consolidation, increase systemic risk and
disadvantage the millions of customers served by small lenders.
Financial strength and reliability. A secondary market must be
financially strong and reliable enough to effectively serve mortgage
originators and their customers even in challenging economic
circumstances. Strong regulatory oversight is needed to ensure the
secondary market operates in a safe and sound manner.
No appropriation of customer data for cross-selling of financial
products. When a community bank sells a mortgage to a secondary market
entity, it transfers proprietary consumer data that would be highly
valuable for the purposes of cross-selling financial products. Without
large advertising budgets to draw in new customers, community banks
grow by deepening and extending their relationships with their current
customer base. Secondary market entities must not be allowed to use or
sell this data. Community banks must be able to preserve customer
relationships and franchises after transferring loans.
Originators must have the option to retain servicing and servicing
fees must be reasonable. Originators must have the option to retain
servicing after the sale of a loan. In today's market, the large
aggregators insist the lender release servicing rights along with the
loan. Transfer of servicing entails transfer of data for cross-selling,
the concern identified above. While servicing is a low-margin business,
it is a crucial aspect of the relationship-lending business model,
giving a community bank the opportunity to meet the additional banking
needs of its customers.
Limited purpose and activities. The resources of any secondary
market entities must be focused on supporting residential and
multifamily housing. They must not be allowed to compete with
originators at the retail level where they would enjoy an unfair
advantage. The conflicting requirements of a public mission and private
ownership must be eliminated.
Private capital must protect taxpayers. Securities issued by
secondary market entities must be backed by private capital and third-
party guarantors. Any Government catastrophic loss protection must be
fully and explicitly priced into the guarantee fee and the loan level
price. This guarantee would provide credit assurances to investors,
sustaining robust liquidity even during periods of market stress.
The Future of the Secondary Markets
There is widespread agreement the secondary market must be
reformed. An aggressive role for the Government in housing is no longer
a viable option. The private sector should and will take the lead in
supporting mortgage finance. ICBA welcomes this new reality as an
appropriate response to the moral hazard and taxpayer liability of the
old system. Community banks are prepared to adapt and thrive in this
environment. But whatever replaces Fannie Mae and Freddie Mac must have
features to allow community banks to continue to prosper as mortgage
lenders and to serve their communities.
The worst outcome in GSE reform would be to allow a small number of
megafirms to mimic the size and scale of Fannie and Freddie under the
pretense of creating a private sector solution strong enough to assure
the markets in all economic conditions. Moral hazard derives from the
concentration of risk, and especially risk in the housing market
because it occupies a central place in our economy. Any solution that
promotes consolidation is only setting up the financial system for an
even bigger collapse than the one we've just been through.
The GSEs must not be turned over to the firms that fueled the
financial crisis with sloppy underwriting, abusive loan terms, and an
endless stream of complex securitization products that disguised the
true risk to investors while generating enormous profits for the
issuers. These firms must not be allowed to reclaim a central role in
our financial system.
ICBA is pleased to see a robust debate emerging on housing finance
reform. A number of serious proposals have been put forth to date--both
from within Congress and from outside--all of which combine promising
features with others that warrant additional consideration and
reworking.
The Housing Finance Reform and Taxpayer Protection Act
ICBA is grateful to Senators Warner, Corker, Tester, and Johanns
for introducing S.1217, the Housing Finance Reform and Taxpayer
Protection Act, as well as Senators Hagan, Moran, Heller, and Heitkamp.
ICBA sincerely appreciates the opportunity to provide input into this
bill. We are encouraged by the inclusion of certain provisions to
accommodate ICBA's concerns. In particular:
The Mutual Securitization company would secure access to
the secondary market for community banks and other small
originators and would allow them to sell loans for cash and to
retain servicing rights.
The Federal Home Loans Banks would also be allowed to issue
securities, creating another access point for community banks.
Limiting issuers to no more than 15 percent of outstanding
guaranteed securities would reduce concentration in the
securitization market by large banks or Wall Street firms.
The FMIC guarantee, well insulated by private capital,
would insure the securitization market continues to function in
times of market stress.
These provisions would help provide access for community banks to
the secondary market without requiring them to take on the additional
risk and cost of securitizing loans. We look forward to continuing to
work with you and the other cosponsors and the Chairman and Ranking
Member to further strengthen the bill and ensure it serves the needs of
community bank customers.
Closing
Thank you again for the opportunity to testify today. Private
entities must play a more robust role in the mortgage securitization
market and taxpayers must be more effectively insulated from any market
failures. That much is settled. But it is critically important the
details of reform are done right to ensure community banks and lenders
of all sizes are equally represented and communities and customers of
all varieties are served.
______
PREPARED STATEMENT OF BILL HAMPEL
Senior Vice President and Chief Economist, Credit Union National
Association
July 23, 2013
Chairman Tester, Ranking Member Johanns, Members of the
Subcommittee, thank you very much for the opportunity to testify at
today's hearing entitled, ``Creating a Housing Finance System Built to
Last: Ensuring Access for Community Institutions''. My name is Bill
Hampel, Senior Vice President and Chief Economist at the Credit Union
National Association (CUNA) headquartered in Madison, Wisconsin. CUNA
is the largest credit union industry trade association representing
America's State and federally chartered credit unions and their nearly
97 million members.
Overview of Credit Union Mortgage Lending
As member owned, not-for-profit financial cooperatives, credit
unions strive to meet their member's financial services need, and
offering home mortgages is an important part of meeting member demand.
Some credit unions have made first mortgage loans since their
inception, but most did not offer mortgage lending services until the
1970s. Credit unions now serve more than 96 million Americans, and
first mortgage lending is an increasingly important component of credit
union lending. First mortgages now account for 41 percent of the total
loans held in portfolio, with the remaining 59 percent of a credit
unions portfolio comprised of second mortgages [13 percent], consumer
loans [39 percent], and small business loans [7 percent]. Just last
year alone, credit unions originated $123 billion of first mortgages,
representing 6.5 percent of the entire mortgage origination market.
Credit unions are now significant players in residential real estate
finance, and historically our market share has risen annually to
reflect the growing demand of our members.
Currently, 4,300 credit unions (62 percent) offer first mortgages
to their members. Because larger credit unions are more likely to offer
mortgages than smaller ones, 88 million (92 percent) of all credit
union members belong to a credit union that offers first mortgages. It
is clear that consumers are choosing credit unions more and more to be
their mortgage lenders, and as Congress considers housing finance
reform, it is critical that credit unions have equitable and readily
available access to a functioning, well-regulated secondary market and
a system that will accommodate the member-demand for long-term fixed-
rate mortgages products in order to ensure they can continue meeting
their members' mortgage needs.
Historically, with fields of membership tied to larger employers,
credit unions have a greater presence in urban areas than in rural
districts. At the end of 2012, 1.1 percent of credit union members
belonged to credit unions headquartered in rural districts. These
credit unions originated $750 million of first mortgage loans in 2012,
or 1.2 percent of the number of loans originated in 2012.
From 2000 to 2006, annual credit union originations of first
mortgages averaged just under $55 billion. As the subprime mortgage
crisis began to weaken the secondary market for mortgage loans in 2006
and 2007, credit union origination volume began to rise dramatically.
Homebuyers increasingly turned to their credit unions as other sources
of mortgage lending dried up. Credit unions were able to meet this
demand because at the time they primarily funded loans from their own
portfolios, and their conservative financial management as cooperatives
meant they were less affected by the financial crisis than many other
lenders. By 2009, credit union originations rose to $94 billion. New
loan volume fell to just above $80 billion in 2010 and 2011 before
rising to over $120 billion in 2012 and the first quarter of 2013, at
an annual rate. This recent increase in volume is due to the desire on
the part of many members to refinance their loans given very low
interest rates.
2013: First Quarter, Annualized
Total first mortgage originations from all lenders peaked at $3.1
trillion in 2005 before plunging to only $1.5 trillion in 2008. Since
then, originations have recovered to just over $1.9 trillion in 2012,
at an annual rate of $2 trillion in the first quarter of 2013. Because
credit union lending increased while the broader market was wracked by
the financial crisis, the credit union share of mortgage lending
sharply increased, from less than 2 percent in 2005 to almost 6 percent
in 2008. Since then, as the broader mortgage market recovered, credit
union lending continued to grow to the point that it accounted for over
6 percent of the market in 2012 and 2013.
Historically, credit unions have been largely portfolio lenders.
From 2000 to 2008, credit unions sold only a third of first mortgage
originations, ranging from a low of 26 percent in 2007 to a high of 43
percent in 2003. The decision of whether to hold or sell a loan depends
primarily on asset liability-management issues, essentially the need to
manage interest rate risk, but also at times, depends on the
availability of liquidity in the credit union. Asset liability
management hinges on such factors as the level of interest rates, the
relative demand for fixed versus adjustable loans from members, the
amount of fixed-rate loans and other longer-term assets already on a
credit union's books, and the maturity of the credit unions funding
sources. Managing credit risk is not the primary factor in secondary
market decisions by credit unions.
As long-term interest rates plunged in 2009 and again in 2011,
credit unions found it increasingly important to sell longer-term,
fixed-rate mortgages to avoid locking in very low earning assets for
the long term. As a result, the proportion of loans sold almost
doubled, to an average of 52 percent from 2009 to 2012, and as much as
58 percent in the first quarter of 2013.
Servicing member loans is very important to credit unions, for a
number of reasons. As member owned cooperatives, credit unions are
driven by a desire to provide high quality member service. Many credit
unions are reluctant to entrust the core function of serving members to
others, unless they have a stake and a say in the entity doing the
servicing. Credit unions are also concerned that third-party servicers
might use the data they gather about credit union members to market
competing products or services. As such, many credit unions service
both the substantial portfolios of loans they hold on their own balance
sheets, and the loans they have sold to the secondary market.
Currently, in addition to the $248 billion of first mortgages that
credit union hold in portfolio, they also service $145 billion of loans
they have sold.
The credit quality of credit union first mortgages held up
remarkably well during the recent financial crisis, especially when
compared to the experience of other lenders. Prior to the Great
Recession, annual net charge-off rates on residential mortgage loans at
both banks and credit unions were negligible, less than 0.1 percent.
However, as the recession took hold, losses mounted. At credit unions,
the highest annual loss rate on residential mortgages was 0.4 percent.
At commercial banks, the similarly calculated loss rate exceeded 1
percent of loans for 3 years, reaching as high as 1.58 percent in 2009.
There are two reasons for this remarkable record at credit unions.
First, as cooperatives, credit unions tend to be more risk-averse than
stock-owned institutions. The incentives faced by credit union
management (generally uncompensated volunteer boards, the absence of
stock options for senior management and board members, the absence of
pressure from stockholders to maximize profits) induce management to
eschew higher-risk, higher-return strategies. As a result, credit union
operations are less risky, and subject to less volatility over the
business cycle. This largely explains why credit unions were able to
increase lending as the financial crisis deepened.
Second, since the bulk of credit union lending is intended to be
held in portfolio rather than sold to investors, credit unions tend to
pay particular attention to such factors as a member's ability to repay
a loan, proper documentation and due diligence, and collateral value
before granting loans.
We believe that in addition to ensuring access to the secondary
market for credit unions, it is also important that the housing finance
system Congress puts in place accommodates the demand of credit union
members and other consumers for long-term, fixed-rate mortgage
products. The data suggest that credit union members overwhelmingly
prefer fixed-rate mortgages. Over the past 10 years, our members have
chosen a fixed-rate product over 80 percent of the time, compared to a
variable rate mortgage (see graph below). Just in the first quarter of
2013, 86 percent of the mortgages issued by credit unions were fixed-
rate products. Congress should acknowledge that the American homebuyer
prefers a fixed-rate mortgages and do everything in its power to ensure
this important mortgage product remains a valuable part of housing
finance.
Overview of CUNA Principles for Housing Finance Reform
As Congress studies and debates the issue of housing finance
reform, we would like to share with this Committee our general
principals with respect to the secondary market needs of credit unions:
1. There must be equal and unbiased access to the secondary market
for lenders of all sizes. CUNA understands that the users--
lenders and borrowers--of a reformed secondary market will be
required to share in the cost of housing finance. However,
these fees should not penalize smaller institutions due to
lender volume.
2. A strong regulator must be created so that rigorous oversight of
the market will ensure safety and soundness, standardization
within the system and guarantee equal access.
3. The new system must provide for liquidity in all economic times
and recognize that all qualified borrowers have the ability to
obtain a mortgage.
4. The new housing finance system should emphasize consumer
education and counseling as a means to safeguard consumers so
they may receive appropriate mortgages.
5. Proper attention should be given to provide products that are
predictable and affordable to all qualified borrowers. The 30-
year fixed-rate mortgage has traditionally been the product
that best fulfills this requirement.
6. Reasonable conforming loan size limits that adequately take into
consideration variations in local real estate costs should be
considered as a necessary component of any legislation.
7. Credit unions strongly believe in the ability to retain the
servicing rights of their members mortgages when sold on the
secondary market.
8. The transition from the current system to any new housing finance
system must be reasonable and orderly.
The Secondary Mortgage Market Reform and Taxpayer Protection Act of
2013
Credit unions appreciate and applaud Senators Corker, Warner,
Tester, Johanns, Heitkamp and Heller for introducing S.1217, the
``Secondary Mortgage Market Reform and Taxpayer Protection Act of
2013''. This bill is a right step towards reforming the housing finance
system and pays special attention to smaller lenders, like credit
unions, while protecting the American taxpayer.
At the heart of the legislation is the creation of the Federal
Mortgage Insurance Corporation (FMIC) that will operate with a Federal
charter. The FMIC is designed to foster liquidity and the availability
of mortgage credit in the secondary mortgage market, while protecting
the taxpayer from losses. The bill calls for the wind-down of Fannie
Mae and Freddie Mac within 5 years, but allows for flexibility to
protect markets from overacting if more time is needed to sell the
Fannie and Freddie portfolios. CUNA understands there may be negative
market reaction to the shuttering of the Government Sponsored
Enterprises (GSE) and we appreciate that thought has been given to the
ramifications for home mortgage finance if this process takes places in
an expedited manner.
The management of the FMIC will be conducted by a Director who will
be appointed for 5 years and chairperson to a five person Board of
Directors with varying backgrounds in mortgage insurance markets,
assets management, community-based financial institutions, and
multifamily housing development. Creation of the independent board is a
thoughtful approach to the management of the FMIC, but because of the
unique structural nature of credit unions we urge that a seat on the
FMIC be reserved for a representative of the credit union system.
Mortgage Insurance Fund and the Government Guarantee
The creation of a Mortgage Insurance Fund (MIF) with the intent to
cover any losses incurred by mortgage securities traded and held in the
secondary market, capitalized by premiums collected from issuers and
investments held in portfolio is an acceptable approach that will
protect taxpayers from losses in the event of a catastrophic economic
event. CUNA appreciates that the MIF will have the ``full faith and
credit of the U.S. Government'' and strict regulation by the FMIC,
which will ensure overpricing of mortgages does not occur.
In addition to the MIF, the bill sets into place a full Government
guarantee as the ultimate backstop and we appreciate that it would only
be used ``in unusual and exigent market conditions'' no more than once
in any given 3 year period. CUNA fully supports the inclusion of an
explicit Government guarantee and the market stability that accompanies
this provision.
Exclusion of the Qualified Residential Mortgage and Considerations of a
Qualified Mortgage
Credit unions also welcome the inclusion of section 207 that would
eliminate for credit unions and other lenders risk retention
requirements that are to be implemented under Qualified Residential
Mortgage (QRM) standards that are being developed by regulators.
Allowing financial institutions to sell properly underwritten mortgages
to the secondary market without the unnecessary burden of retaining a
significant portion of the loan on a credit unions balance sheet is
greatly appreciated.
We urge the committee to take a closer look at the Qualified
Mortgage (QM) rule issued by the Consumer Financial Protection Bureau
earlier this year as you consider housing finance reform. Historically,
credit unions have been portfolio lenders, holding 60-75 percent of the
mortgages they write on the books in most years prior to the financial
crisis. The incentives of portfolio lenders are different from those
that primarily sell into the secondary market, given that the lender
bears the entire risk of default. Portfolio lenders have strong
incentives to pay close attention to the borrower's ability to repay,
and credit unions, given that their members are also their owners, have
especially strong incentives to employ sound underwriting practices.
There is a very real concern that credit unions will not be able to
offer mortgages to their members who do not meet all of the QM
standards, but nevertheless have the ability to repay a mortgage loan.
Our prudential examiners may ``encourage'' credit unions to focus only
on QMs as a way to limit a lender liability, furthermore, the secondary
market may be unwilling to accept non-QM loans if viewed negatively by
regulators. However, strict adherence to QM does not facilitate the
kind of creative products that are possible through portfolio lending
based on the individual circumstances of each member.
Simply put: credit unions have every incentive to evaluate a
member's ability to repay because their members are also their owners.
We encourage the Committee to work with the CFPB and prudential
regulators to ensure lenders with a proven history of properly writing
non-QM loans will retain the continued ability to serve the mortgage
finance needs of all members who can afford an appropriately structured
mortgage, whether it is QM or not.
Secondary Market Access
Section 215 would establish a ``Mutual Securitization Company
(MSC)'' the purpose of which would be ``to develop, securitize, sell,
and meet the issuing needs of credit unions and community and midsize
banks with respect to covered securities.'' CUNA strongly supports the
creation of the MSC that will ensure credit union access to a well
regulated secondary market in a manner that will safeguard fairness and
market liquidity during every economic occurrence.
Credit unions do have concerns regarding the relatively low asset
cap of $15 billion per institution. As the marketplace continues to
force never ending changes to the size of community based financial
institutions, thought must be given to the future appearance of these
organizations. Credit unions have seen the largest influx of membership
in our history, gaining over 2 million members in the past year. As
more Americans embrace the benefits of becoming a credit union member,
we fully expect the explosion in credit union membership growth to
continue. As a direct result of such growth many credit unions over the
next 10 to 15 years could be above the $15 billion asset cap. We urge
the committee to consider higher caps so that more community based
institutions can access the MSC. Increasing the eligibility size of
credit unions and community banks will also ensure that the MSC is well
capitalized, guaranteeing its future stability.
The bill would also increase the role of the Federal Home Loan Bank
(FHLB) system in the securitization process of mortgages to the
secondary market. CUNA encourages the increased usage of FHLBs and sees
the entities as a positive force in housing finance. As we have
previously noted for the sponsors of the legislation, only a small
number of credit unions use the Federal Home Loan Banks, due in large
part to FHLB requirements that hinder their access. For example, in
order to join a FHLB, a portion of a credit union's qualifying assets
must be in either mortgages or mortgage backed securities, which
creates problems for smaller credit unions. Further, State chartered
privately insured credit unions are not permitted to join a FHLB.
Conclusion
In conclusion, CUNA recognizes that reforming the secondary market
to ensure a viable housing market is no easy task. We greatly
appreciate the leadership this Committee has put forward in addressing
the needs and concerns of our members so that the American dream of
home ownership will not be disadvantaged by inflated costs and
Government imposed limitations that could result in undue impediments
that would hinder access to a safe and affordable secondary market.
______
PREPARED STATEMENT OF ANDREW J. JETTER
President and Chief Executive Officer, Federal Home Loan Bank of
Topeka, on behalf of the Council of Federal Home Loan Banks
July 23, 2013
Good Afternoon Chairman Tester, Ranking Member Johanns, and Members
of the Subcommittee. My name is Andrew Jetter and I am the President
and CEO of the Federal Home Loan Bank of Topeka. I appreciate the
opportunity to speak to you today on behalf of the Council of Federal
Home Loan Banks (Council), a trade association representing all of the
Federal Home Loan Banks (FHLBanks).
Federal Home Loan Bank System Overview
Initially, I would like to describe the FHLBanks and their critical
role in providing cost-effective funding and other services to members
to assist them in financing housing and community and economic
development. Following that, I will address our understanding of the
role of community financial institutions in providing mortgage finance,
the challenges they face, and how the FHLBanks currently assist them in
that role.
The FHLBanks were created in 1932 to support America's housing
finance system through their member thrift institutions and insurance
companies. Since that time, Congress has expanded the mission of the
FHLBanks to include support for affordable housing, community
development, and other forms of community lending and has expanded
eligibility for membership in the FHLBanks to commercial banks, credit
unions, and community development financial institutions. Advances
(fully secured loans to member institutions) represent the core of the
FHLBanks' business. Members rely on the FHLBanks to provide competitive
access to liquidity across all economic and credit cycles. This
liquidity enhances the financial strength of local lenders so that they
can meet the housing finance and other credit needs of their
communities through a range of products and services.
During the Nation's financial crisis, when dislocations in the
capital markets made funding from other sources difficult, the FHLBanks
were a critical source of funding for U.S. financial institutions,
preventing far greater losses and potential failures. The FHLBanks were
able to increase their lending to members of every asset size and in
every part of the country by $370 billion--from a total of $650 billion
in the second quarter of 2007 to over $1 trillion in the third quarter
of 2008. The FHLBanks were able to carry out this essential liquidity
function for their members without requiring taxpayer assistance. The
crucial role played by the FHLBanks was recognized in an extensive
study prepared by the staff of the Federal Reserve Bank of New York.
This study found that during the financial crisis the Federal Home Loan
Bank System was ``by far, the largest lender to U.S. depository
institutions while most of the Federal Reserve's liquidity operations
have been for the benefit of nondepository institutions or foreign
financial institutions.'' \1\ The backstop role played by the FHLBanks
was also recognized by William Dudley, President of the Federal Reserve
Bank of New York, who noted that when the interbank lending market
dried up in 2007, depository institutions turned to the Federal Home
Loan Bank System for needed liquidity. \2\
---------------------------------------------------------------------------
\1\ Federal Reserve Bank of New York, Staff Report No. 357 at pp.
28-29 (November, 2008).
\2\ ``May You Live in Interesting Times'', Remarks of William
Dudley, Executive Vice President of the Federal Reserve Bank of New
York, October 17, 2007.
---------------------------------------------------------------------------
The FHLBank System's Unique Structure Has Enabled It to Successfully
Fulfill Its Mission Since 1932
The FHLBanks have been able to successfully fulfill their mission
as a result of several unique characteristics: their cooperative
structure; a scalable, self-capitalizing, operating model; broad
participation by a diverse membership; and dependable access to a deep,
liquid market for FHLBank debt.
Cooperative Structure
The FHLBank System has a unique structure, comprised of twelve
independent cooperatives and the Office of Finance that issues debt on
behalf of those twelve regional FHLBanks. The FHLBanks are overseen by
an independent regulator, the Federal Housing Finance Agency (FHFA),
established by the Housing and Economic Recovery Act of 2008 (HERA Act
of 2008). Each FHLBank is a separate and distinct corporate entity with
its own stockholder--member institutions and its own board of
directors. While the FHLBanks issue debt collectively and are jointly
and severally liable for the repayment of those debt obligations, there
is no single controlling entity with responsibility for or authority
over the FHLBanks. Each FHLBank operates independently under the
authority granted by Congress through the Federal Home Loan Bank Act,
as amended, and in accordance with the regulations established by the
FHFA.
Each FHLBank operates within a district originally established by
the Federal Home Loan Bank Board, one of the predecessors to the FHFA.
Each FHLBank's capital stock can only be purchased by its member
institutions. Each member must purchase the FHLBank's capital stock in
order to become a member, and must maintain capital stock holdings
sufficient to support its business activity with the FHLBank in
accordance with the individual FHLBank's capital plan.
Scalable, Self-Capitalizing, Operating Model
The FHLBank System is built to be scalable--advance levels ebb and
flow with credit cycles to match member demand. Since the height of the
crisis, advances have declined by more than half as weak asset growth
and excess liquidity have reduced members' need for advances. The
decline in advance levels, following their rapid expansion,
demonstrates that the FHLBank model works as intended.
As cooperatives, FHLBanks are not subject to the growth imperative
that often drives the decisions of publicly traded corporations. Demand
for advances expands and contracts with economic and market conditions
and the FHLBanks' capital stock outstanding appropriately adjusts to
these changes. Although the specific requirements vary based on each
FHLBank's capital plan, an institution must hold a certain level of
capital stock to be a member. In addition, a member must maintain
``activity-based'' capital stock in proportion to the amount of
advances it has outstanding.
During periods of credit expansion, the activity-based stock
requirement automatically provides additional capital to support
advances growth. For example, in the recent liquidity crisis, the
signficiant increase in advances was accompanied by the purchase of
additional capital stock to support those advances, thereby providing
additional capital to the FHLBanks in direct proportion to the increase
in assets. This allowed each FHLBank to meet the liquidity needs of its
members while preserving the safety and soundness of the cooperative.
An FHLBank's capital stock cannot be issued to or held individually
by members of an FHLBank's board of directors, its management, its
employees, or the public, and is not publicly traded. There is no
market for FHLBank capital stock other than among FHLBank members. The
price of an FHLBank's capital stock cannot fluctuate, and all FHLBank
capital stock must be purchased, repurchased, or transferred only at
its par value. There are no stock options or other forms of stock-based
compensation for FHLBank management, directors, or employees.
Broad Participation by a Diverse Membership
The membership of the FHLBank System consists of thrifts,
commercial banks, credit unions, insurance companies, and community
development financial institutions. At the end of first quarter of
2013, the FHLBanks had 7,604 members, composed of: 967 thrifts; 5,169
commercial banks; 1,185 credit unions; 268 insurance companies; and 15
community development financial institutions.
The composition of the FHLBank membership closely approximates the
composition of the banking industry: 88 percent of members have less
than $1 billion in assets compared with 91 percent of all banks and
thrifts and 97 percent of all credit unions industry wide. Typically,
advances utilization rates are fairly consistent across asset size
groups, though smaller institutions are currently funding a larger
portion of their balance sheets with advances than larger institutions.
Many of these smaller institutions have limited or no direct access to
the capital markets other than through their FHLBank.
In addition to depository institutions, over 250 insurance
companies are now members of an FHLBank. Insurance companies are a
significant part of the System, representing almost 13 percent of
outstanding advances. These members play an important role in the
housing market by holding substantial amounts of single and multifamily
mortgages and agency debt. Many insurance company members are also
active participants in the Affordable Housing Program (AHP) and the
Community Investment Program (CIP) as an extension of their involvement
in economic development activities.
The mortgage finance and community lending industry is broad and
varied. This variety is crucial to both financial innovation and the
diversification of risk across institutions of differing size,
geography, charter, and business model. By providing equal access to
liquidity, the System supports the current structure of the industry
and this structure can be a source of stability and strength moving
forward. As Congress looks to restructure the housing finance system in
this country, all member types of the FHLBank System will have an
important role to play in meeting the Nation's housing finance needs.
Dependable Access to a Deep, Liquid Market for FHLBank Debt
The market for FHLBank debt is one of the most liquid. To the end
investor, this liquidity represents an appealing characteristic.
Collectively, the FHLBanks issue debt in significant volume on a daily
basis. The size, frequency, and consistency of issuance mean that it
takes less time for the market to absorb new issues during both normal
and stressed markets. In turn, this makes it profitable for dealers to
allocate capital against FHLBank underwriting and trading. Greater
capital allocations, in turn, mean greater liquidity in the market.
This liquidity enables the FHLBanks to fund at attractive levels
across a host of terms and structures. In turn, they pass this
advantage on to their members. All members receive the benefit of
attractive funding, regardless of their size. Because advances are made
at relatively narrow spreads to borrowing costs, attractive issuance
levels for FHLBank debt translates directly into lower advance rates
for members. In turn, these members are able to pass these benefits on
to their communities in the form of affordable credit.
Another benefit of the depth and liquidity of the market for
FHLBank debt is that the System is able to rapidly scale up its
issuance with member demand for advances. The FHLBank debt franchise is
well recognized and highly desired by a host of global investors due to
its liquidity and credit quality. During 2008 and 2009, against a
dislocated bond market, the System was able to increase debt
outstanding by $365 billion over 14 months. This added funding provided
a lifeline to financial institutions across the country. It is because
of the depth and liquidity of the FHLBank debt market that the System
is able to tap the markets in size when demand surges--even during
extreme distress.
Advances and Member Services
Members use advances to fund new originations and existing
portfolios of mortgages, to purchase mortgage-backed securities, and to
manage the substantial interest rate risk associated with holding
mortgages in portfolio. Some members layer in term advances alongside
their deposits, altering the duration profile of their liabilities to
better suit their assets and mitigate risk. Other members use shorter-
term, on-demand liquidity to offset unexpected deposit runoff or to
take advantage of an opportunity to quickly add assets. By enabling
members to effectively manage their balance sheets, advances lower the
cost of extending credit to American consumers.
In accordance with statutory requirements, all advances are secured
by eligible collateral and the purchase of capital stock. When FHLBanks
issue advances, they lend against both the credit of the member-
borrower and the quality of the collateral. Each FHLBank establishes
its own processes and procedures for assessing the credit worthiness of
borrowers and the appropriate lending value of pledged collateral.
FHLBanks regularly monitor actual and potential borrowers' financial
condition to ensure appropriate credit actions have been taken to
protect the FHLBank against any potential loss arising from any
extension of credit. In addition to evaluating members' financial
reports, FHLBanks also monitor macroeconomic trends and local laws and
regulations, and regularly interact with the member's management teams
to ensure they stay attuned to the member's financial condition.
Each FHLBank establishes the types of assets that will be accepted
as eligible collateral, defines the specific underwriting requirements
and identifies the lendable value that will be applied to each eligible
asset. Collateral practices vary among the FHLBanks with regional
differences accounting for some of the differences. For example, some
districts are dominated by larger commercial banks where others are
primarily served by community financial institutions. Some markets
display a concentration of loans exceeding the conforming loan limits,
where others are well within the limits. On the coasts, there is a
higher concentration of commercial real estate lending, and in the
midwest some institutions specialize in agricultural lending. Based on
these regional differences and the risk appetite of each FHLBank,
collateral practices will vary. Examples of these variations include,
but are not limited to, the types of assets accepted as eligible
collateral, the specific underwriting requirements applied to each
asset class, the member's collateral reporting requirements, pricing
techniques, and on-site collateral reviews.
The valuation and management of member collateral is a process that
relies on regional expertise and market knowledge. During a time when
many institutions attempted to streamline or outsource credit
underwriting and collateral evaluation processes, the FHLBanks stuck to
the basics and combined conservative collateral valuation practices
with effective credit policies. The System has an impressive track
record as a result.
Beyond assessments and risk management, FHLBanks provide a variety
of member services, such as correspondent services that leverage local
knowledge to deliver value. While these services vary across the
System, it is clear that the strong relationships between FHLBanks and
their members are mutually beneficial and integral to the strength of
each cooperative.
FHLBank Mortgage Programs
The System has an excellent track record of working with members to
manage risk in the mortgage purchase programs that some FHLBanks have
administered for over 16 years. In these programs, a participating
FHLBank purchases traditional conventional single-family mortgages
originated by member institutions under a risk-sharing agreement
between the FHLBank and the member. The FHLBanks essentially offer two
different versions of mortgage purchase programs. The Mortgage
Partnership Finance (MPF) Program generally involves the selling member
providing a credit enhancement to the FHLBank that can be called upon
if the performance of the pool of loans sold incurs losses above a
certain level. The FHLBank of Chicago created the program and
administers many aspects of the program for participating FHLBanks.
Another MPF variation allows members to sell their loans through their
FHLBank to Fannie Mae, although without any risk sharing obligation.
The other program is the Mortgage Purchase Program offered by a few
FHLBanks that essentially involves the creation of a reserve account
against the pool of loans sold by the member that is paid out to the
member over time depending on the loss experience of the pool.
The collective portfolio of mortgage loans held by the FHLBanks in
both programs carries a 1.94 percent seriously delinquent rate in
comparison to a 6.16 percent seriously delinquent rate for all
conventional loans nationwide. Total actual credit losses from
mortgages held in portfolio since the program's inception in 1997 have
been less than 5 basis points of the average portfolio balances
annually.
These programs are an example of the success that can be achieved
from ``skin-in-the-game'' mortgage partnerships. Community bankers
exemplify ``skin-in-the-game'' business principles on a daily basis--
their success is dependent upon being fully invested in the success and
survival of the communities that they serve. Prudent underwriting,
adequate appraisals, and the provision of appropriate credit products
that suit an individual borrower's needs are fundamental operating
principles for community bankers.
The FHLBank of Topeka offers the Mortgage Partnership Finance (MPF)
Program. The MPF program is critically important to supporting our
housing finance and community and economic development mission and is
especially important for our community financial institution members.
The district that we serve is comprised of smaller and more rural
communities where agriculture is a leading economic force. With a total
population of 13.7 million, we are the smallest of the FHLBank
districts. The median size of our counties is much smaller than the
median size of counties across the U.S.
Our MPF program is focused on serving community financial
institutions and providing a reliable secondary market conduit for
them. Ninety-three percent of the current MPF balances have been
aggregated from community financial institutions with total assets of
approximately $1 billion or less. Since inception, over 240 members
have sold loans to the FHLBank of Topeka using the MPF program. The
portfolio is broadly distributed with the largest concentration held by
a single participating member at 6 percent, with the next largest
concentrations at just over 2 percent. The average size of a
participating member's mortgage loans in our MPF portfolio is
approximately $24 million. Our MPF program is broadly representative of
our financial institutions and the local communities that they serve.
The fundamental MPF concept--that the actual lender making the
credit decision should retain ``skin in the game'' will drive better
credit performance in mortgage portfolios--has a proven successful
track record. This concept of lender retained risk has been at the
forefront of the mortgage finance reform debate. Congress and
regulators need only look to the FHLBanks' mortgage programs to see the
concept in action. Our MPF portfolio of mortgage loans carries a 0.4
percent seriously delinquent rate in comparison to a 6.16 percent
seriously delinquent rate for all conventional loans nationwide. Since
inception, annual credit losses on our MPF program have not exceeded 2
basis points of the average portfolio balances.
The FHLBank mortgage programs have been highly successful in adding
value to members through product innovation and service. At a time when
other secondary market participants are consolidating their services,
increasing delivery and guarantee fees and imposing surcharges on low
volume lenders (or providing high volume lenders with discounts),
members have recognized that they can rely on their FHLBank to meet
their secondary market needs. The mortgage purchase programs allow
community financial institutions to be competitive with larger
financial institutions and mortgage lenders and to remain active
housing lenders within their communities.
Housing and Community Lending Programs
For more than 20 years, the FHLBanks' Affordable Housing Program
(AHP) has been one of the largest private sources of grant funds for
affordable housing in the United States. It is funded with 10 percent
of the FHLBanks' net income each year. These grant funds are
distributed through a competitive process to projects developed through
partnerships of member institutions and local developers and housing
organizations. AHP grants subsidize the cost of owner-occupied housing
for individuals and families with incomes at or below 80 percent of the
area median income (AMI), and rental housing in which at least 20
percent of the units are reserved for households with incomes at or
below 50 percent of AMI. The subsidy may be in the form of a grant or a
below-cost or subsidized interest rate on an advance. AHP funds are
primarily available through a competitive application program at each
of the FHLBanks. AHP funds are also awarded through a home ownership
set-aside program to assist low and moderate income households in
purchasing homes, with at least one-third of the funds being used to
assist first-time homebuyers. The AHP allows for and encourages funds
to be used in combination with other programs and funding sources, such
as the Low-Income Housing Tax Credit. These projects serve a wide range
of neighborhood needs: many are designed for seniors, the disabled,
homeless families, first-time homeowners and others with limited
resources. As of year end 2012, more than 806,000 housing units have
been built using AHP funds, including 490,000 units for very low-income
residents. The total AHP dollars awarded from 1990 through 2012 is
approximately $4.8 billion.
Each Federal Home Loan Bank also operates a Community Investment
Program (CIP) that offers below-market-rate loans to members for long-
term financing for housing and economic development that benefits low-
and moderate-income families and neighborhoods. Members use CIP
advances to fund the purchase, construction, rehabilitation,
refinancing, or predevelopment financing of owner-occupied and rental
housing for households with incomes at or below 115 percent of AMI. The
program is designed to be a catalyst for economic development since it
supports projects that create and preserve jobs and help build
infrastructure to support growth. Lenders have used CIP to fund owner-
occupied and rental housing, and to construct roads, bridges, and
sewage treatment plants as well as to provide small business loans.
From 1990 to 2012, the FHLBanks' CIPs have lent over $68 billion for a
variety of projects, resulting in 771,000 housing units.
The FHLBanks' Community Investment Cash Advance (CICA) programs
offer funding, often at below-market interest rates and for long terms,
for members to use to provide financing for projects that are targeted
to certain economic development activities. These include commercial,
industrial, manufacturing, and social services projects,
infrastructure, and public facilities and services. CICA lending is
targeted to specific beneficiaries, including small businesses, and
households at specified income levels.
I would like to take some time to inform you about some of the
programs and initiatives that my bank, the FHLBank of Topeka, has
undertaken on behalf of our members, particularly our smaller members,
to help them serve the lending and credit needs of their communities.
The AHP supports our housing finance mission by providing subsidies
to its members for the provision of affordable owner-occupied and
rental housing to very low-, low-, and moderate-income households. More
than 33,000 housing units have been built using AHP funds and more than
$145 million have been awarded through our competitive program.
In addition to the competitive application program, AHP funds are
also awarded through the home ownership set-aside program. Under this
program, an FHLBank may set aside up to the greater of $4.5 million or
35 percent of its AHP funds each year to assist low- and moderate-
income households purchase homes. Our members obtain the AHP set-aside
funds and then use them as grants to eligible households. The FHLBank
of Topeka's set-aside is geared to our smaller, community-based
members. We limit the amount of funds each member may use annually and
we restrict the use of the funds to the purchase of homes only in
nonurban areas of our district. Since the program's inception in 1995,
participating members have used just over $28 million to assist 7,255
households purchase homes.
FHLBank members are able to obtain advances (loans) through the
Community Investment Program (CIP) and Community Investment Cash
Advances (CICA) programs. For ease of our member's use, the FHLBank of
Topeka has separated the housing and economic development portions of
these programs into our Community Housing Program (CHP) and Community
Development Program (CDP). Advances taken through CHP and CDP are
priced below our normal interest rates and may be for longer terms,
allowing our members to provide financing for projects that are
targeted to housing or economic development activities at fixed rates.
Throughout our district, members have used CDP to match fund loans
or pools of loans to their customers for a variety of activities,
including: commercial real estate, small business lending, farm real
estate, and a variety of agricultural credit needs. Members meet the
commercial lending needs in their communities by:
Match funding loans for single projects on a case-by-case
basis
Funding a group of eligible loans as a pool
Funding loan participations
Since 1999, our members have been approved for nearly $2.2 billion
in CDP funds, financing more than 1,700 projects involving the creation
or retention of 4,500 jobs.
Corporate Governance
Congress established a unique ownership and governance structure
for the FHLBanks, which has served the FHLBanks well in the past and
continues to do so today. A critical feature of this structure is that
the FHLBanks are wholly owned by their members/customers so each
FHLBank's interests are simultaneously aligned with those of its
members and customers. In addition, the boards of directors of the
FHLBanks are independent of management. No member of management may
serve as a director of an FHLBank.
The Federal Home Loan Bank Act provides that a majority of each
FHLBank's directors must be elected by its member financial
institutions from among officers and directors of those institutions.
Members vote for directors representing member institutions from their
States. At least two-fifths of the directors must be independent
(nonmember) directors. The HERA Act of 2008 altered the governance
structure of the FHLBanks to provide for the election of independent
directors by the FHLBanks' members, rather than their appointment by
the regulator. HERA also required that at least two of each FHLBank's
independent directors must represent the ``public interest'' by having
more than 4 years of experience in representing consumer or community
interests on banking services, credit needs, housing, or financial
consumer protection. The remaining independent directors must have
demonstrated knowledge or experience in financial management, auditing
and accounting, risk management practices, derivatives, project
development, organizational management, or such other expertise as the
FHFA Director provides by regulation.
The Federal Home Loan Bank Act also provides that no member may
cast a number of votes in the election of directors greater than the
average number of required shares held by members in its specific
State. This prevents large members holding relatively large amounts of
an FHLBank's capital stock from dominating director elections and, in
practice, means that the majority of each FHLBank's member directors
generally represent the small institutions that make up the great
majority of members.
The statutory framework that controls the composition of the
FHLBanks' boards of directors ensures that each FHLBank's board of
directors will have a balance of interests represented. With no members
of management on the board of directors, directors are in a position to
independently oversee management actions. The members that contribute
capital and benefit from the FHLBank's products and services are
assured a majority of the directors. The director election voting
preferences for small members ensure that larger members cannot
dominate the board of directors and that an FHLBank's policies will not
be detrimental to small members. Finally, the large contingent of
independent directors ensures that the FHLBanks will benefit from
perspectives and expertise independent of the membership.
Risk Management
The Federal Home Loan Banks are highly regulated entities, subject
to regulation and supervision by the Federal Housing Finance Agency
(FHFA).
As 12 independent institutions, each FHLBank is responsible for
appropriately developing and implementing its own risk management
activities. The cooperative structure of the FHLBanks eliminates many
of the incentives a publicly traded company might have to raise its
risk profile, and in fact discourages FHLBanks from taking excessive
risk. Just as FHLBank members do not expect equity investment returns
on their capital stock investments in an FHLBank, they also do not
expect equity investment risk in that investment. Members purchase
FHLBank capital stock in order to obtain access to FHLBank funding
products, and must maintain capital stock investments in the FHLBank as
long as they continue to be members. Members provide the capital that
supports their advance transactions with the FHLBanks. In this
environment, members expect stability, reliability and consistency of
returns and credit product pricing. These member expectations are
reflected in the oversight provided by each FHLBank's board of
directors, a majority of which is comprised of directors representing
member institutions.
Through a rigorous process, each FHLBank continually manages the
pool of collateral backing an advance. This includes frequent
monitoring of performance, pricing, and valuation. Members are required
to maintain a sufficient pool of performing collateral, so they
regularly replace delinquent loans and add collateral based on changes
in haircuts and valuations. These precautions ensure sufficient
overcollateralization at all times.
When an FHLBank lends to a troubled member, it does so in
consultation with that member's primary regulator. In the event that
the member subsequently becomes insolvent, this process enables the
FDIC to minimize losses to the Deposit Insurance Fund. In a liquidation
scenario, the FDIC typically pays off outstanding advances in exchange
for the timely release of collateral in an attempt to maximize the
resolution value of the institution. Should the FDIC opt out of this
arrangement, the FHLBank can liquidate the collateral to pay off any
advances.
For an FHLBank to take a loss on an advance the liquidation value
of a member's pledged assets plus the member's investment in FHLBank
stock would have to be less than the outstanding advance plus
prepayment fees (the fair value of the advance). This is extremely
unlikely--since the establishment of the System in 1932, no FHLBank has
taken a credit loss on an advance. In the event that collateral was
insufficient to cover a defaulting member's borrowings, the next line
of defense to FHLBank shareholders would be the failed member's
investment in capital stock. This capital is proportional to either the
size of the member (asset-based stock purchase requirement) or to the
outstanding balance of advances (activity-based stock purchase
requirement, which increases along with activity). It is hard to
envision a situation in which a member would lose its capital
investment in an FHLBank due to the failure of another member.
From the vantage point of debt investors and taxpayers, the
FHLBanks' joint and several liability structure provides additional
insulation from any loss that might occur at an individual FHLBank.
Even if an FHLBank suffers losses, the aggregate amount of capital
stock and retained earnings on the balance sheet of the 12 FHLBanks,
collectively, would provide a deep layer of insulation from losses. The
combination of the FHLBanks' cooperative structure and the multiple
layers of risk mitigation provide an abundance of private capital to
buffer bondholders and taxpayers from potential losses.
Financial Condition
The FHLBank System reported net income of $2.6 billion in 2012, up
from $1.6 billion in 2011, making 2012 the most profitable year since
2007. For the third consecutive year, all 12 FHLBanks were profitable.
As a result of this profitability, the FHLBanks have been able to
continue building their retained earnings. As of YE 2012 retained
earnings were at $10.5 billion, having grown 250 percent since 2008 as
the FHLBanks prudently strengthened this component of capital as a risk
mitigant. Having completed their statutory obligation in 2011 under the
Federal Home Loan Bank Act to make payments related to the Resolution
Funding Corporation, all of the FHLBanks have entered into a Joint
Capital Enhancement Agreement to further strengthen their financial
soundness. Under this agreement, each FHLBank, on a quarterly basis,
allocates 20 percent of its net income to a separate restricted
retained earnings account established by that FHLBank. These restricted
retained earnings accounts cannot be used to pay dividends to members
and continue to build at each FHLBank until they are equal to one
percent of that FHLBank's total outstanding consolidated obligations.
Role of Community Financial Institutions in the Housing and Mortgage
Finance Market
Community financial institutions remain significant players in
housing finance, notwithstanding the continuing pace of greater
concentration being observed in both mortgage originations and
servicing. The core strength community financial institutions bring to
the market is their deep knowledge of local markets and their personal
relationship with customers. In smaller communities and in rural
markets, community financial institutions are often the sole source of
mortgage credit as larger institutions focus on more populated areas.
While not having the dominant share of mortgage originations,
community financial institutions originate a significant amount of
mortgage loans. As shown in the table below, during the first quarter
of 2013, $435 billion of mortgages were originated. Community banks and
thrifts with less than $10 billion in total assets originated $55
billion of residential mortgage loans during the first quarter of 2013.
Community financial institutions play an important role as an
investor in mortgage loans and mortgage-backed securities. As portfolio
lenders, community financial institutions invest in mortgage loans
originated in their local markets. Some institutions have had success
holding in portfolio both conforming and nonconforming mortgages. Other
lenders have developed a strategy of holding nonconforming mortgages
and selling conforming mortgages. Nonconforming mortgages, whether
because they exceed the conforming limit (jumbos) or because they do
not meet all of the underwriting criteria of the agencies, still can be
well underwritten and of high quality. There are occasions where a
lender may need to make an accommodation in underwriting the loan such
that it does not qualify under the secondary market rules. When this
occurs, the ability of these loans to be placed into the lender's
portfolio ensures a broader section of the community has access to home
loans.
U.S. banks and thrifts held $2.4 trillion in residential mortgage
loans on their books at March 31, 2013. Of the $2.4 trillion 43 percent
was held by smaller financial institutions.
Community financial institutions also play a significant role in
supporting liquidity in the mortgage-backed securities market through
purchases of MBS securities. As of March 31, 2013, banks and thrifts
held $1.7 trillion on their balance sheet with smaller financial
institutions holding approximately $0.8 trillion. Community banks and
thrifts with total assets of less than $10 billion held $0.3 trillion
of these mortgage-backed securities.
Community financial institutions often prefer to retain servicing
of their mortgage originations, including those sold into the secondary
market. The primary reason is to maintain the personal customer
relationship between the community financial institution and their
customers. While the mortgage servicing industry has undergone
significant consolidation over the past decades, community financial
institutions continue to strive to maintain high quality and cost
effective servicing for their customers. As of March 31, 2013, the top
ten mortgage servicers serviced $6.2 trillion of residential mortgages,
or 79 percent of the total and the remainder--primarily community
financial institutions--serviced $1.7 billion, or 21 percent of the
total.
Community financial institutions maintain a disciplined approach to
managing risks, including risks on their balance sheet. As such,
community financial institutions will have limits as to the levels of
fixed-rate residential mortgage loans that they desire to carry on
their balance sheet. Therefore, it is not uncommon that these financial
institutions need to sell off portions of their new mortgage loan
originations into the secondary market. During the first quarter of
2013, small financial institutions and mortgage lenders sold $78
billion to Fannie Mae and Freddie Mac.
Community Financial Institution Challenges in Mortgage Finance and the
Secondary Market
Community financial institutions have always played a critical role
in housing and mortgage finance in support of their local communities.
But today they face enormous challenges and uncertainty.
The FHLBanks are currently conducting a survey of our members to
determine the issues that are impacting their mortgage business and
what role they would like the FHLBanks to play in support of their
mortgage activities moving forward. Some of the initial results would
indicate a high level of uncertainty regarding their ability to
continue to profitably make residential mortgages.
Much of the concern relates to new rules around qualified mortgages
and the capital requirements under the new Basel III rules. Although
some of these proposed rules were recently finalized with changes
favorable to community financial institutions, there continues to be a
high level of concern with the time, attention, resources and costs
needed to comply.
One favorable change in Basel III relates to risk-based capital
(RBC) rules for credit enhancements that would impact the credit
enhancement members provide under the MPF Program. During the Program's
nearly 16 plus year history, the RBC rules have been somewhat punitive
given the superior credit performance of the loans as the rules did not
seem to fully account for the credit structure supporting the loans or
the FHLBank's first loss account (FLA) designed to cover normal and
expected losses. The newly adopted Basel III rules more appropriately
account for the FLA and provide a much better result in terms of
required RBC. We hope that members would be given the option to apply
this treatment earlier than the implementation date of Basel III. At
the same time, however, the formulas applied to the credit structure
are relatively complicated and our members will require education and
assistance to comply with the new rules and calculations.
Increased regulation--combined with the possibility that larger
financial institutions will have an increased aggregation role moving
forward--is very troubling to our members. Our members value the
ability to underwrite the mortgages made in their communities and to
continue to service the loans. Both of which would be greatly
diminished if selling to larger aggregators or securitization sponsors
is the only path to the secondary markets in the future.
Freddie Mac recently announced their intent to charge a $7,500 fee
to originators with less than $5 million in annual business--many of
which would be community-based financial institutions. In 2012,
approximately 40 percent of the FHLBank of Topeka's participating
members sold less than $5 million into our MPF Program. While Freddie
Mac subsequently rescinded their low activity fee, we believe that this
illustrates how a large aggregator may work with small community-based
institutions.
There are other challenges created by new and proposed regulations
governing mortgage servicing and mortgage loan originations that will
add to the cost and complexity of regulatory compliance. While there
has been much discussion on finding ways to reduce this burden on
community financial institutions, more needs to be done.
FHLBank Support of Mortgage Lenders
The FHLBanks play a variety of important roles in supporting
community financial institutions in their role of financing homes.
Our community financial institutions use advances from the FHLBanks
in a variety of ways. On a broad level, the FHLBanks provide a key
supplement to the deposit funding institutions primarily rely on.
Today, community financial institutions are experiencing strong deposit
growth, but this is not typical. When businesses and communities are
growing, community financial institutions experience strong loan
demand. Meeting that loan demand just from deposits is generally not an
option and that is when community financial institutions rely on their
FHLBanks to provide additional funding.
For portfolio lenders, it is important to manage the interest rate
risk involved in longer-term fixed-rate loans. The FHLBanks offer a
variety of advance products to meet the needs of those lenders. Members
can obtain long-term fixed-rate funding to match the mortgages held in
portfolio. Amortizing advances are available that can be matched to a
portfolio of mortgages the member holds. Advances are available that
allow the member the option to prepay the advance without fee to match
the convexity of the member's mortgage portfolio. The FHLBanks also
provide technical assistance to members in understanding how to
quantify and manage the interest rate risk from a portfolio of fixed-
rate loans. When a community financial institution sells to other
institutions, FHLBanks will provide warehouse lending, funding the loan
between the time the loan is closed and the loan is sold.
We support their secondary market needs through our MPF and MPP
programs when they have loan originations that they do not wish to hold
in their portfolios. Our MPF and MPP program's premise rests on the
simple, yet powerful, idea that by combining the credit expertise of a
local lender with the funding and hedging advantages of the FHLBanks, a
stronger, and more economical and efficient method of financing
residential mortgages would result. These mortgage programs give
mortgage lenders the best options of mortgage lending--lenders retain
the credit risk in their loans and transfer the interest rate and
prepayment risks to the FHLBank. Participating financial institutions
are able to preserve their customer relationships and are paid to
manage the credit risk of their customers. These programs charge no
lender surcharges--allowing smaller community financial institutions
equitable access and the ability to more effectively compete in the
mortgage finance market against their larger competitors.
A majority of community banks, thrifts, and credit unions
participating in the mortgage programs hold approximately $1 billion or
less in total assets and are more comfortable dealing with their
FHLBank than selling directly to Fannie Mae. These members already have
a relationship with their FHLBank and obtain better pricing through the
FHLBanks. Small banks, thrifts, and credit unions do not have
sufficient volumes to qualify for discounts on guarantee fees charged
by Fannie Mae to protect against credit losses. The volume pricing
available to the FHLBanks and passed on to small community financial
institutions is a huge benefit that allows them to compete on rates
against larger financial institutions and mortgage lenders. The MPF
program also allows small banks, thrifts, and credit unions to retain
mortgage servicing and maintain more control over the customer
relationship. Community lenders can retain servicing or can work with
the servicers approved for the program.
Some of the FHLBanks offer a product called MPF Xtra. Through MPF
Xtra, mortgage loans are aggregated through FHLBanks and sold to Fannie
Mae. This service complements our other mortgage programs. More
notably, the program provides a crucial service to community financial
institution members that want to continue to make home loans. For our
members that want 30-year fixed-rate mortgages to be available at a
competitive price, our role as an aggregator and our price point
compare favorably with selling directly to Fannie Mae.
There are numerous other ways in which community financial
institutions and the FHLBanks partner to serve their communities. From
providing letters of credit for securing public unit deposits to
providing direct grants to support low- to moderate-income housing, the
FHLBanks partner with community financial institutions to serve the
public.
S.1217--the ``Housing Finance Reform and Taxpayer Protection Act of
2013''
The Council welcomes the opportunity to share with you our views on
housing finance reform generally, and more specifically our views on
the recently introduced bill S.1217--the ``Housing Finance Reform and
Taxpayer Protection Act of 2013''. We commend you for your extensive
efforts in working to achieve a sustainable housing finance system for
the future that does not expose the taxpayer to unnecessary risk.
The Council believes that the FHLBanks have a critical role to play
in serving their members in the housing finance system of the future.
The unique characteristics of the FHLBank System that have made it
possible for the FHLBanks to carry out their mission of serving their
members and their communities (their regional, scalable, self-
capitalizing, cooperative structure; broad participation by a diverse
membership; and dependable access to a deep, liquid market for FHLBank
debt) should be maintained in a future housing finance system. The
FHLBanks have demonstrated their role as a safe and reliable provider
of liquidity throughout the recent financial crisis, and their
regional, self-capitalizing, cooperative structure will enable them to
serve their members' needs in a safe and sound manner in a future
housing finance system.
We are pleased that S.1217 recognizes the importance of maintaining
a role for institutions of all sizes in the housing finance system of
the future, and contains provisions intended to preserve equal and
reliable secondary market access for small and midsize community
financial institutions to help maintain reliable access to mortgage
credit throughout all parts of the country. We appreciate that the bill
provides different options for the FHLBanks to serve their members as
the housing finance system of the future evolves. With the support and
guidance of our members, we are open to exploring opportunities to
expand our support of community lenders. At the same time, we emphasize
the paramount importance of maintaining and protecting our continuing
role as a reliable source of liquidity for our members.
We look forward to working with you and your members as the
legislative process moves forward.
Conclusion
Over their long history, the FHLBanks have played a critical role
in supporting their member financial institutions' ability to meet the
housing finance and credit needs of their local communities in all
economic cycles and in all parts of the United States. The FHLBank
cooperative model performed exceptionally well throughout one of the
worst financial crisis in this Nation's history, without requiring any
taxpayer assistance. The FHLBanks remain economically strong today and
continue to serve a vital function for their financial institution
members and the communities they serve.
Chairman Tester, Ranking Member Johanns, and Members of the
Subcommittee, thank you for the opportunity to appear before you today
to discuss the FHLBanks and housing finance reform. I would be happy to
answer any questions you have.
______
PREPARED STATEMENT OF MICHAEL MIDDLETON
Chairman and Chief Executive Officer, Community Bank of Tri-County,
Waldorf, Maryland, on behalf of the American Bankers Association
July 23, 2013
Chairman Tester, Ranking Member Johanns, my name is Michael
Middleton, Chairman and Chief Executive Officer of the Community Bank
of Tri-County in Waldorf, Maryland. I appreciate the opportunity to be
here to represent the American Bankers Association (ABA) and present
our views regarding reforming the Government's role in secondary
mortgage markets. ABA represents banks of all sizes and charters and is
the voice for the Nation's $14 trillion banking industry and its two
million employees.
The ABA commends Senators Corker, Warner, Tester, Johanns, Hagan,
Heitkamp, Heller, and Moran on the introduction of the Housing Finance
Reform and Taxpayer Protection Act (S.1217) to address the Federal
Government's role in the mortgage market and resolve the longstanding
conservatorship of Fannie Mae and Freddie Mac.
This bipartisan legislation is a positive first step in what is
certain to be a long process toward creating a sustainable, rational,
and limited role for the Federal Government in supporting and
regulating a mortgage market that is appropriately and predominately
filled by the private sector. The bill follows principles long
advocated by the ABA, and builds upon the framework detailed by the Bi-
Partisan Policy Center's Housing Commission, on which ABA's CEO, Frank
Keating, served.
S.1217 creates the Federal Mortgage Insurance Corporation (FMIC)
which would serve as a public guarantor of eligible mortgages and a
regulator of the issuers, aggregators and credit enhancers involved in
a revised secondary market. The approach taken with the FMIC addresses
a number of key concerns with the Government's role in the housing
finance markets. It provides a set of incentives to shrink the
Government's involvement, while establishing the structure for a liquid
and private market.
We would also note that to fully protect taxpayers from additional
losses like those suffered by Fannie Mae and Freddie Mac during the
financial crisis, it will be necessary to impose similar reforms on the
Farm Credit System, which continues to follow the discredited model of
privatized gains and public losses which failed so badly in the housing
sector. Without similar reforms to the Farm Credit System, it is only a
matter of time until taxpayers again are put at risk.
The task ahead will not be easy. The mortgage market is a complex
and intricate part of our Nation's economy that touches the lives of
nearly every American household. Fannie Mae, Freddie Mac, Farm Credit
System, and the Federal Housing Administration currently constitute the
bulk of available financing for the American mortgage market. It is,
therefore, imperative that reform be done so as not to inflict further
harm on an already fragile housing economy and, most importantly, does
not inadvertently harm creditworthy Americans who want to own a home.
Reform must be deliberate, as the current situation is not viable for
the long term. Addressing the many concerns and interests of a wide
range of participants will require much negotiation, compromise and
cooperation. There is much work yet to be done, but this bill is a
solid foundation on which to begin the process.
In my statement today, I would like to make three key points:
S.1217 is consistent with principles long advocated by the
ABA, and builds upon the framework for single-family housing
finance detailed by the Bi-Partisan Policy Center's Housing
Commission;
S.1217 moves to facilitate the reduction of the Federal
Government's role in single-family housing finance; and
Although S.1217 addresses a number of key concerns with GSE
reform, there remain a number of outstanding issues that must
be addressed to ensure the viability of the new system and that
the mortgage markets continue to function properly.
I. S.1217 Is Consistent With Principles Long Advocated by the ABA
ABA believes the Government's role in housing finance must be
dramatically reduced. It should be limited to ensuring access to the
secondary market for lenders of all sizes and governmental agencies
should not compete directly with the private market. This structure
must provide for stability and accessibility of the capital markets in
the event of a market failure.
S.1217 is an important first step in addressing the role of the
Federal Government in supporting and regulating mortgage markets. As
Congress works to develop a consensus on broad reforms, ABA believes
lawmakers should be guided by the following principles developed by the
bankers serving on ABA's GSE Policy and Federal Home Loan Bank
Committees:
1. The primary goal of any Government-sponsored enterprise (or a GSE
successor) in the area of mortgage finance should be to provide
stability and liquidity to the primary mortgage market for low-
and moderate-income families.
2. In return for the GSE (or a GSE successor) status and any
benefits conveyed by that status, these entities must agree to
support all segments of the primary market, as needed, in all
economic environments.
3. Strong regulation, examination, and authority for immediate
corrective action of any future GSE must be a key element of
reform.
4. Any GSE or successor involved in the mortgage markets must be
strictly confined to a well-defined and regulated secondary
market role and should not be allowed to compete with the
private, primary market.
5. Any reform of the secondary mortgage market must consider the
vital role played by the Federal Home Loan Banks and must in no
way harm the traditional advance businesses of FHLBanks, their
member's access to advances or to its mission as it has been
defined and refined by Congress over time.
6. GSEs or successors must both be allowed to pursue reasonable
risks, but the risk/reward equation must be transparent and
more rigorously defined and regulated.
7. GSEs or successors must operate within a framework of market
procedures and regulation governing the securitization of all
mortgage assets.
8. A better alternative to arbitrary ``skin in the game'' is the
establishment of strong minimum regulatory standards to assure
sound underwriting for all mortgages, regardless of whether
they are sold or held. Comparable standards should be
established for all loan originators with comparable levels of
effective regulatory oversight.
9. Accounting and regulatory changes should be developed to more
appropriately reflect and align securitizations with underlying
risks. True sales treatment and regulatory capital charges
should appropriately reflect the reality of true risk-shifting
activities, as well as balance sheet exposures.
10. Affordable housing goals or efforts undertaken by the GSEs or
successors should be delivered through and driven by the
primary market, and should be structured in the form of
affordable housing funds available to provide subsidies for
affordable projects. GSEs or successors must provide for fair
and equitable access to all primary market lenders selling into
the secondary market.
ABA has long maintained that the primary goal of any Government-
sponsored enterprise in the area of mortgage finance should be to
provide stability and liquidity to facilitate the ability of the
primary mortgage market to provide credit for borrowers who have the
credit and skill sets required to achieve and maintain home ownership.
S.1217 would replace Fannie Mae and Freddie Mac with a new Federal
guarantor, the Federal Mortgage Insurance Corporation (FMIC), modeled
in part on the Federal Deposit Insurance Corporation (FDIC).
The FMIC is designed to provide fully priced and fully paid Federal
guarantees on securities backed by loans meeting specified
requirements. By fully pricing the risks associated with insuring these
mortgage loans, the legislation addresses a key shortcoming that has
plagued the existing system and provides for the development of a
private market. For too long, the guarantee fees (G fees), paid to
insure loans backed by the current GSEs, were too low--the compensation
being paid for what amounts to full Government backing was simply not
priced correctly.
Although the conservator of the GSEs, the Federal Housing Finance
Agency (FHFA) has raised the G fee to encourage development of the
private market, and to begin to repay the Government for its current
support, more needs to be done both to protect taxpayers and to
encourage the return of capital to the private market. G fees must be
set high enough so that the private market will be able to price for
risk in a fashion that allows for safe and sound investment and lending
at a rate that is comparable (and eventually better) than the rate
charged by the GSEs or any successor such as the FMIC. Such a structure
also allows the FMIC tools to intervene if necessary in the event of
crisis or market failure.
Underwriting will also play an important role in the proposed FMIC.
The FMIC will only cover eligible loans that meet strict underwriting
requirements. In order to be eligible a loan must have at least a 20
percent downpayment as well as meeting Qualified Mortgage requirements.
While we support this approach, we note that it does make it that much
more essential for the Consumer Financial Protection Bureau to get the
Qualified Mortgage rules right, and that banks be given the appropriate
time needed to come into compliance with those rules.
Another provision of this legislation is the lowering of the
maximum loan limit for eligible single family mortgage loans to a more
reasonable $417,000. The current maximum loan limit of $625,500 in high
cost areas and $417,000 in all other regions is dramatically higher
than necessary for the purchase of a moderately priced home, especially
in light of housing price declines nationwide. While some high-cost
areas persist (and a recovery of the housing market will entail a hoped
for stabilization and recovery in home values), the conforming loan
limits for most of the Nation should be reduced. This will assist the
development of a private market for loans outside of the conforming
loan limits as a step to a more fully private market for most loans.
The legislation allows the Federal Home Loan Banks (FHLBs) to
continue their existing mission, providing a key source of liquidity to
our Nation's banks, while also allowing for the FHLBs to act as
aggregators and issuers of securities guaranteed by the FMIC. The FHLBs
play a vital role in the mortgage markets and community economic
development that must be protected. This plan preserves the traditional
advance business of the FHLBs and access to advances by their members,
particularly for community banks which play a vital role in providing
mortgage finance and economic development.
The bill would allow for a potential expansion of the role played
by the FHLBs in housing finance if they choose to become aggregators
and issuers for the FMIC. In doing so, the FHLBs would be required to
establish a new subsidiary, authorized by this bill, which would be
separately capitalized from the existing FHLBs. The bill makes clear
the intent that activities of any subsidiary are not part of the joint
and several obligations applicable to the FHLB system. We support this
intent and would like to work with the authors and the Committee to
ensure that any necessary additional provisions to protect the existing
FHLB system and its members which may be identified as the process
continues are also incorporated. In particular, we emphasize that
existing capital in the FHLB system is fully deployed, and as a general
circumstance is a member asset that would not be available to
capitalize new ventures.
The bill also provides for the creation of a mutual entity to
ensure small-lender access to the capital markets if such access were
not available through another issuer, or through a Federal Home Loan
Bank issuer. Small-lender access to the secondary market is of vital
importance. In order for community banks to remain competitive, they
must have access to the liquidity provided by the secondary market on
an equitable basis regardless of size, location or market served. We
applaud the attention the bill pays to this concern, though we note
that capitalization of a new cooperative owned by small lenders may
pose a challenge. We also note that many community banks also have
existing relationships with larger institutions which may choose to
become issuers under the bill's provisions, while others engage in
correspondent or other arrangements with larger institutions. FMIC is
tasked with maintaining equitable access to the portals for smaller
lenders. Preserving this multiplicity of access points will be
important as the reform process evolves, and we want to work with the
Committee to ensure that in establishing new structures and access
points, existing relationships and mechanisms are not inadvertently
harmed.
Similarly, we note that the bill would ensure that existing debt
already guaranteed by Fannie Mae and Freddie Mac benefits from the full
faith and credit of the United States. Because of the trauma suffered
by the financial markets and the borrowers they served during the
recent financial crisis, it is important to move forward in a cautious
and well-considered fashion. By ensuring that currently guaranteed
mortgages remain covered, this plan would prevent an unexpected shock
that could destabilize mortgage markets.
II. S.1217 Would Reduce the Federal Government's Role in Housing
Finance
ABA believes that the role of the Government in housing finance
should be dramatically reduced from its current level and a private
market for the vast majority of housing finance should be fostered. The
Government's role should be limited to well-targeted borrowers and
covered loans and ensuring stability and accessibility of the capital
markets in the event of market failure. The proposed FMIC intends to
reduce governmental involvement and foster private sector financing--
ensuring that financing can involve private sector banks of all sizes.
Multiple sources of liquidity for private market lenders will lead to a
more diverse and ultimately safer housing financing system.
A well-regulated private market should be the desired financing
source for the bulk of borrowers whose income and credit rating qualify
them for conventional financing. Private markets function much more
efficiently, better allocating the limited resources and credit.
Additionally, a larger private market means fewer loans guaranteed by
taxpayers, reducing the potential liability.
As proposed, the FMIC's role would be much more limited than the
existing role of Fannie Mae and Freddie Mac. Currently, the GSEs
undertake a wide set of mortgage market services, securitizing,
bundling and issuing mortgage-backed securities. There is no reason for
this function to be performed by a Government entity. By limiting the
FMIC's scope to simply insuring and regulating these markets, the bill
creates the environment for a strong and healthy private market to
perform the same function. And because the legislation requires
participating private entities to take a first loss position ahead of
any Government guarantee provided by the FMIC, it limits taxpayer
exposure.
The FMIC's role would be two-fold. It would insure the smaller set
of covered loans, ensuring a liquid and resilient housing finance
market as well as the availability of credit. Also important, would be
its role as regulator. The FMIC would replace the Federal Housing
Finance Agency, regulating the players in the new housing finance
market. Strong regulation, examination and authority for prompt
corrective action are key elements of any reform proposal and which, if
implemented correctly, will also help to reduce taxpayer liability.
III. A Number of Issues Must Be Addressed To Ensure Viability of the
New System and To Allow Mortgage Markets To Function Properly
This bill is an important step in the right direction. In order for
it to accomplish its goal of a more limited governmental role while
also ensuring that mortgage markets continue to function properly, a
number of outstanding issues must be addressed.
The First Loss and Capitalization Requirements Will Limit the Number of
Private Entities Participating in Securitizations
A key concern is the ability of private sector entities to
participate in the activities given the capital requirements set forth
in the bill. Although the bill allows private entities to participate
in the securitization, bundling and issuing of mortgage-backed
securities, doing so requires a separately capitalized entity. These
entities are required to have capital sufficient to cover any losses
and are required to maintain a first loss position of not less than 10
percent of the face value of any covered security. At a time when the
financial services industry is being asked to raise capital levels, it
will likely be difficult, if not infeasible, for many potential
participants to fund these separately capitalized entities and, thus,
to participate.
Presently, a host of new banking regulations are coming into effect
including Basel III and new leverage requirements--requiring banks to
raise capital levels. ABA fears that few, if any, financial services
institutions will have the free capital to fund a separately
capitalized entity to undertake the securitization activities with the
first loss positions required under the bill, particularly when other
capital requirements are taken into consideration. Potentially, only a
handful of large banks and other institutions with significant access
to capital markets may be able to participate. This will only serve to
further concentrate the industry. As previously noted, we also have
similar concerns about the Federal Home Loan Banks' and the proposed
mutual entity's ability to capitalize sufficiently to meet the bill's
requirements. This concern would extend to the other credit enhancers
such as mortgage insurers and guarantors encompassed by the bill.
ABA supports the overall structure envisioned by the bill with the
FMIC acting as a guarantor, and private entities acting as aggregators,
issuers and credit enhancers, but we believe further work is needed in
setting the appropriate level of first loss and capitalization required
of these entities.
The FMIC Should not Serve as the Regulator for the Federal Home Loan
Banks
ABA also has concerns with tasking the FMIC with the regulation of
the Federal Home Loan Bank System. While it is logical and prudent to
have the FMIC regulate approved issuers under the new system, including
any subsidiary of the Federal Home Loan Banks that serves as an issuer,
we fear that having the FMIC regulate the entire FHLB System will
create potential conflicts of interest that may harm the System and its
members. Essentially the FMIC and its regulated entities will serve as
a replacement for Fannie Mae and Freddie Mac. The Federal Home Loan
Banks will continue in their traditional role, which means that they
will function as a counterpart and, in some respect, competitive
alternative to the FMIC. It is ill-advised to have one competitor
regulate another. For this reason, we strongly urge that an alternative
structure be considered for the regulation of the Federal Home Loan
Banks in carrying out their traditional mission. One potential
alternative is to keep that function as part of an ongoing single
purpose Federal Housing Finance Agency.
A More Thorough Examination Is Needed on the FMIC's Role in Multifamily
Housing Finance
Although this bill moves to reform most aspects of the Government's
involvement in housing finance markets, it would retain a large role
for the FMIC in multifamily finance. Currently Fannie Mae and Freddie
Mac play an outsized role in the finance of multifamily real estate.
This bill does little to change that, other than to transfer existing
authorities and activities from the GSEs to the FMIC. We believe that a
more thorough examination is needed regarding the proper role of the
Government in the multifamily finance market, and that additional
legislation may be needed to more appropriately reform the multifamily
housing market and the role played by the Federal Government in
multifamily finance.
Conclusion
S.1217 provides an important first step towards creating a
sustainable, rational and limited role for the Federal Government in
supporting and regulating a healthy mortgage market provided
predominantly by the private sector. The mortgage market is an
important part of our Nation's GDP, which touches the lives of nearly
every American family. As such it is important that these reforms are
carefully considered, so as to ensure the continued functioning of the
labor market.
We emphasize our caution that Congress be deliberate and reasoned
in crafting such a monumental endeavor to avoid any disruptions of the
nascent housing market recovery which would materially impact the
Nation's broader economic recovery.
ABA commends the authors of this legislation for approaching this
difficult issue in a manner that encourages discussion and moves to the
establishment of a healthy private mortgage market. The ABA stands
ready to work with the authors and the entire Congress to achieve such
ends.
Additional Material Supplied for the Record
STATEMENT SUBMITTED BY THE COMMUNITY HOME LENDERS ASSOCIATION
The Community Home Lenders Association is pleased to submit this
written statement to the Senate Banking Committee on this hearing which
focuses on the importance of ensuring that consumers have access
through smaller community lenders to affordable mortgage loans under a
reformed housing finance system.
The Community Home Lenders Association (CHLA) is a national
nonprofit association of small and midsized community based nonbank
mortgage lenders. The mission of the CHLA is to advocate for Federal
mortgage programs, rules and regulations which treat community mortgage
lenders fairly, and which reflect the critical importance that these
lenders play in providing access to mortgage credit for borrowers, in
increasing competition in mortgage markets, and in giving borrowers the
option of obtaining mortgage loans and services at the personalized,
local level which community mortgage lenders provide.
One of the strengths of our mortgage finance system has been the
role that securitization has played in providing long-term fixed-rate
mortgages for single- and multifamily housing. Securitization allows
mortgage lenders located anywhere in the country to originate loans and
sell them off, thus replenishing the originator's reserves and capacity
to originate new loans. This has created a vibrant market in which
smaller banks, credit unions, and nonbank mortgage lenders can actively
participate in mortgage markets, provided they are responsible and
originate according to loan underwriting standards that the ultimate
purchasers or guarantors establish.
For many decades, this process worked well, creating a TBA market
for 30-year fixed-rate loans and fueling a vibrant housing market which
has increased home ownership rates and helped the housing sector play a
vital role in the economy. Obviously, though, this process did not
always work so well, such as during the subprime housing boom, with the
result being the Federal Government putting Fannie Mae and Freddie Mac
into receivership, advancing hundreds of billions of tax dollars to
cover GSE loan losses, and providing TARP funds to major financial
institutions that were over-exposed to mortgages.
Now, Congress is at a crossroads, facing momentous decisions on how
to deal with Fannie and Freddie, and how to restructure our Nation's
mortgage finance system, to achieve the twin goals of continuing to
provide available, affordable long-term fixed-rate mortgage loans to
meet our Nation's housing needs, while at the same time responsibly
protecting taxpayers.
In this respect, the CHLA commends the Subcommittee for holding his
hearing, and the Committee for beginning a debate on these critical
issues. The CHLA also commends the work of a bipartisan group of
Senators in introducing S.1217, a comprehensive bill to reform our
mortgage finance system. The CHLA believes S.1217 is an excellent
start, with many good provisions. Still, much more work lies ahead in
debating these issues, finding ways to strengthen the bill's
provisions, and ultimately implementing a workable solution.
The CHLA is taking this opportunity to submit a written statement
to focus on the critical importance of getting mortgage reform right in
terms of creating a diverse mortgage market that continues to include
community based lenders, and smaller banks and credit unions. This is
essential to having a truly competitive mortgage market, in which
consumers have real choices. We also need to get this right, because if
we don't, we may end up with a mortgage market dominated by a few large
banks and financial institutions that are ``too big to fail,'' and,
because of their central role in housing finance, effectively ``too
important to fail.''
On the central debate about whether there should be a continued
Federal guarantee of MBS, the CHLA takes the position that such a
guarantee is warranted, and that S.1217 forms a good starting point for
achieving that goal. A Federal guarantee would provide essential
liquidity to ensure affordable fixed-rate long term mortgages for our
Nation's housing needs, while also ensuring countercyclical lending
when the private sector exits the market due to adverse economic
conditions. A Federal guarantee is also important to ensuring that
mortgage credit is available in all regions and for all property types.
The CHLA believes this can be done in a way that protects taxpayers,
through risk sharing to create market discipline and private absorption
of first losses, guarantee fees that reflect the true risk to the
Government, and sound regulation.
But regardless of the details of how mortgage reform is done, the
CHLA would like to identify the key issues and principles that we
believe must be debated and addressed, in order to ensure a broad,
consumer-oriented mortgage market.
Making Sure There Is a Cash Window for Smaller Loan Originators
The CHLA appreciates that a great deal of effort went into S.1217
to address concerns about smaller lenders having access to mortgage
markets if the originator can't securitize the loans themselves. This
includes language about the importance of access to a ``cash window,''
and authorization of a both cooperative and the FHLB's to serve this
function.
However, the CHLA believes it is critical, both in the drafting of
the legislation and its implementation, that such access is actually
achieved. The CHLA would like to make two important points. First, the
FLHB provision may be very helpful to banks and credit unions, but does
not help nonbank community mortgage lenders. In fact, the existence of
the FHLB option, if it works, could put less pressure on making sure
the cooperative works, which would mean that only nonbank community
lenders are left out. Secondly, whether through revised language or
through a very strong commitment in practice to make this work, the
CHLA believes it is critical to ensure that the cooperative--or
whatever mechanism is designed to provide a cash window--ACTUALLY works
in practice. Because, if not, we could lose a very vital portion of our
housing finance system.
Fair and Equitable Pricing
One of CHLA's concerns comes from the experience with the GSEs, in
which volume discounts and other features were at times used to create
a pricing structure which unfairly discriminated against smaller loan
originators. Consumers are best served--and fairness dictates--that
regardless of how mortgage reform is done, all players in a position of
power within the market should have a pricing structure that is fair
and equitable, that provides for access to secondary markets on full
and equal terms to all qualified loan originators, of all types and
sizes.
The CHLA notes that S.1217 requires that the new regulator shall
carry out the bill in a manner that credit unions and community and mid
sized banks shall have equal access to any common securitization
platform and are not discriminated against through discounts for volume
pricing or other mechanisms. This is a good start, but the CHLA has two
recommendations to strengthen this. First, the CHLA believes it is
important to modify the bill where it refers in places like this to
smaller banks and credit unions to also refer to community based
nonbank mortgage lenders, as these lenders play an important part in
our mortgage markets and should have comparable treatment. Secondly,
the CHLA believes that prohibitions against volume discounts or other
mechanisms that discriminate against smaller lenders should apply not
just to a Federal insurance guarantee on the MBS, but also to other key
players in the process, including guarantors and issuers.
In addition to concerns about price discrimination, it is also
important that net worth and capital requirements not be utilized in a
manner that unreasonably discourages qualified loan originators and
servicers. It is fair and reasonable for loan originators to have
sufficient capital to be a going concern, to meet buyback/
indemnification responsibilities and for servicers to meet advance
obligations. But net worth requirements should always be transparent
and nondiscriminatory among lenders, and should be reasonably related
to indemnification and advance exposure.
Without such equitable treatment, smaller and midsize mortgage
lenders would not be able to compete on equal terms, and the result
could be a market dominated by only the biggest lenders.
Avoid Conflicts Between Securitizers and Origination Affiliates
Another major concern is the fact that many of the Nation's largest
securitizers also have extensive loan origination distribution
networks. Regardless of how mortgage reform is done, it is likely that
the largest banks and securities firms will control the process of
securitizing mortgages. If these same securitizers channel this power
into exclusively purchasing loans from their affiliated mortgage
originators, in short order small community based lenders, banks, and
credit unions could quickly be cut out of the mortgage origination
business.
These types of concerns could be exacerbated if, as is likely, risk
sharing is required. Currently even moderately sized mortgage
originators are able to securitize Fannie Mae and Freddie Mac loans, as
there is a relatively simple Federal guarantee. However, if
securitizations in a reformed world generally require risk sharing
through the securitization structure itself--eg., through subordinated
tranches--then many moderately sized lenders may no longer have the
expertise and capability of doing these more complicated securities
structures. They may then be cut out of the securitization market.
There are many potential ways to address these concerns. One blunt
instrument might be to limit market share of any one lender.
Alternatively, there may be ways to do this by constraining the ability
of securitizers to exclusively channel loans to lender affiliates, or
to ensure, in practice, that there is a competitive guarantee option
that is not tied to securitizers, such as private mortgage insurance.
However, regardless of the solution, Congress should acknowledge the
challenge, and take steps to anticipate and address concerns about
these factors that could lead to a highly concentrated mortgage market.
Risk Sharing Must Be Done Right
As noted, there seems to be an increasing likelihood that,
regardless of the way mortgage reform unfolds, risk sharing will play
an important role. The CHLA applauds the Federal Housing Administration
(FHFA) for its pilot program to investigate various risk sharing
models. Before Congress and the Nation commit to any mortgage structure
that heavily relies on risk sharing, there needs to be some degree of
assurance that this can work, and work on a scale needed to meet our
Nation's mortgage needs. We should not gamble with housing, which plays
such a critical component in our Nation's economy.
Moreover, risk sharing should be done right. First, any guarantee
should be incontestable; a guarantee should be a guarantee, not an
opportunity to negotiate with the lender to see whether they might
first foot the bill for losses, even though the lender did everything
right in underwriting the loan. Correspondingly, the lender should bear
its traditional historical responsibilities--underwriting loans
according to loan standards, taking buyback risk related to reps and
warranties, and assuming servicing responsibility for advances.
Finally, if risk sharing is to become an important component of
lending, Congress and the regulators should strive to create a broad
and competitive market for different guarantee sources, so that the
market does not become concentrated as a result of a narrow range of
options.
Single Securitization Platform
The CHLA applauds the both the provisions of S.1217, and the
efforts of the FHFA to create a single securitization platform. The
CHLA believes these are important steps to create the most competitive
possible market for consumers, by creating opportunities for all
lenders, including community based nonbank mortgage bankers, community
banks, and credit unions.
In closing, the CHLA is pleased to participate in this important
debate about the future of America's housing finance system, and to
offer these views and recommendations.
______
STATEMENT SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION
Chairman Tester, Ranking Member Johanns, and Members of this
Subcommittee, as Fannie Mae and Freddie Mac (the GSEs) approach their
fifth full year in conservatorship, it is important that policy makers
begin defining the future role of the Federal Government in the
mortgage market. Two bills, including a bipartisan bill introduced by
Senators Bob Corker and Mark Warner, have recently been introduced in
Congress and signal a promising beginning to this important debate.
The Mortgage Bankers Association (MBA) \1\ appreciates the
opportunity to support the important role played by community lenders
in our Nation's housing market. Congress needs to ensure that any end
state it considers affords lenders of all sizes the securitization
options to directly access the secondary market--this principle is
critical to level the playing field and create a vibrant, competitive
market for the engine of the American Dream.
---------------------------------------------------------------------------
\1\ The Mortgage Bankers Association (MBA) is the national
association representing the real estate finance industry, an industry
that employs more than 280,000 people in virtually every community in
the country. Headquartered in Washington, DC, the association works to
ensure the continued strength of the Nation's residential and
commercial real estate markets; to expand home ownership and extend
access to affordable housing to all Americans. MBA promotes fair and
ethical lending practices and fosters professional excellence among
real estate finance employees through a wide range of educational
programs and a variety of publications. Its membership of over 2,200
companies includes all elements of real estate finance: mortgage
companies, mortgage brokers, commercial banks, thrifts, REITs, Wall
Street conduits, life insurance companies, and others in the mortgage
lending field. For additional information, visit MBA's Web site:
www.mortgagebankers.org.
---------------------------------------------------------------------------
Background
As Congress considers both transitional and end-state reforms, it
should ensure that the federally supported secondary market provides
equal access and execution options that work for smaller, community-
based lenders. Community lenders are crucial to this marketplace,
providing Americans across the country with safe, sustainable, and
affordable mortgage credit. Policy makers should proceed carefully to
ensure that a future housing finance system promotes a robust and
competitive mortgage market.
According to HMDA data from 2011, more than 7,500 lenders
originated mortgages in that year. Fannie Mae and Freddie Mac report
that roughly 1,000 lenders are direct sellers to the GSEs, and Ginnie
Mae currently has more than 250 issuers. The vast majority of these
lenders are smaller independent mortgage bankers and community banks.
Not every smaller lender has the financial capacity or expertise to
directly manage the risks and complexities of the secondary market.
Many prefer instead to sell whole loans to aggregators. Others are
uncomfortable selling only to aggregators because they do not want to
risk losing other key product relationships with their customers. For
some, it is critical to have direct access to the secondary market
during times when the aggregators reduce their demand. Lenders with the
appropriate skills and capital should have the opportunity to make
their own choices about how, when, where, and to whom to market loans
they originate, based on their core competencies and other strategic
objectives.
Unfortunately, current GSE practices sometimes limit the choices of
otherwise qualified lenders. Eliminating these practices would be a
significant transition step toward a vibrant future mortgage market,
and in fact need not await legislative action.
Congress should, however, ensure that the future mortgage market is
accessible to smaller, community-based lenders in a meaningful way.
These lenders need a secondary market system that delivers:
Price certainty, including guarantee fees that reflect the
risk of the underlying loan and the true counterparty risk of
the originator
Execution for both servicing-retained and servicing-
released loans
Single-loan and/or small pool executions with a low minimum
pool size
Ease of delivery; and
Quick funding.
The cash windows operated by the GSEs provide some, though not all,
of these aspects today. Moreover, while Ginnie Mae provides a means of
securitizing individual loans, the complexity of the process has kept
many smaller originators from becoming direct issuers, resulting in
fewer Ginnie issuers relative to GSE direct sellers.
MBA Position
MBA believes that an explicit Government backstop is absolutely
necessary for a vibrant, competitive secondary mortgage market. Serious
consideration should be given to expanding the membership criteria of
the Federal Home Loan Bank system (FHLBs). For example, Congress could
allow nondepository institutions to purchase a class of capital stock
that would provide nondepository mortgage lenders the opportunity to
participate in and contribute to the market liquidity provided by the
FHLBs.
Small mortgage lenders also require certain elements to be present
in order to enjoy meaningful access to the secondary market. These
elements will be elaborated upon below.
Explicit Federal Guarantee
A vibrant, competitive mortgage market that is accessible to all
creditworthy borrowers will require an explicit Federal guarantee,
albeit one that is well defined, limited, and called upon only after
deep layers of private capital have been exhausted. An important
corollary is that any reforms--whether transition steps or end-state
reforms--should also ensure that the federally supported secondary
market provides equal access and execution options that work for
smaller, community-based lenders. This is an important precondition for
a vibrant, competitive mortgage market that works for borrowers,
investors, and the American taxpayer.
Expand FHLB Membership
MBA believes serious consideration should be given to expanding
FHLB membership to include nondepository mortgage lenders. These
lenders are often smaller, community-based independent mortgage bankers
focused on providing mainstream mortgage products to consumers. In
exchange for membership in the FHLB system, these institutions could be
required to hold a limited class of stock with appropriate
restrictions. Expanding FHLB access to these institutions would enhance
market liquidity and ensure a broader range of mortgage options for
consumers.
Key Elements for Small Lenders
Increase Price Certainty and Transparency--One concern with the
current market structure's ability to provide meaningful, equitable
access for all lenders has been varied pricing offered to different
loan sellers. Although the GSEs have claimed that these disparities
have narrowed, there is little transparency on the terms of pricing and
underwriting criteria offered throughout the market, despite the fact
the enterprises have been operated by an agency of the Federal
Government for almost 5 years.
The Federal Housing Finance Agency (FHFA) currently has the
authority to eliminate these opaque pricing and underwriting terms, and
should do so as soon as possible. In addition, any successor to the
GSEs that operates with a Federal guarantee should have a transparent
fee structure based on the risk inherent in the transaction. This
approach would recognize that private capital providing credit risk
protection in front of the Government guarantee may price differently
across originators. Finally, the use of underwriting concessions should
be eliminated (except perhaps for limited-time pilot programs), and
access to special programs, products, and delivery options should be
open to any lender meeting required minimum eligibility standards that
do not include delivery volume.
Enhance Execution Options for Smaller Lenders, Including Allowing
for Single-Loan Execution--Because of the risks associated with the
GSEs' large retained portfolios, most proposals regarding the future of
the federally backed secondary mortgage market do not envision the
successors to the GSEs having a balance sheet to fund a cash window.
Today, there are existing and potentially new means available to
regulators and the GSEs for delivering a small number of loans into
multilender pools. For example, the Ginnie II and Fannie Majors
programs both allow single-loan execution.
However, these programs are more complex than using the cash
windows, and thus only a small number of lenders utilize them. While
Congress debates the long-term future of the market, these processes
can and should be simplified now in order to build a successful
platform for sustainable, single-loan, multilender execution. For
example, although multilender securities might not price as well in the
capital markets as larger pools from a single lender, any discount
could be reduced by pooling practices that increase the size of these
multilender securities. In addition, it is important for some smaller
lenders that they be able to securitize loans on a servicing-released
basis.
Currently, the GSEs have programs in place which facilitate
bifurcation of originator and seller reps and warrants so that
originators can deliver loans servicing-released. However,
participation in these programs is tightly restricted. Such programs
are necessary going forward, and should be made more broadly available
to smaller lenders as soon as possible. MBA believes these programs do
not require direct facilitation from any other market participant and
that smaller sellers should be able to negotiate reps and warrants
directly with any approved servicer.
Quicker Funding--It is also important for smaller originators to
have an option for receiving quicker funding. Today, GSE cash windows
provide daily funding. Congress should consider including in its
ultimate reform plan more frequent settlement dates to permit quicker
funding. Broker-dealers already provide a bid for off-settlement-date
trades using interpolated pricing. The expectation is that this market
could grow if more sellers utilize it, benefiting community lenders and
reducing costs for borrowers.
To be approved today, direct sellers to the GSEs or issuers in the
Ginnie Mae program must meet financial and managerial standards.
Smaller lenders who wish to be direct issuers will likely need to meet
the standards set by the public guarantor in a future model. These
standards need to be set at levels that allow for meaningful access by
smaller lenders.
Conclusion
As policy makers begin transitioning the market toward the desired
end state for the GSEs--either through regulatory, administrative, or
legislative actions--there are two items that need particular
attention.
First, the cash window needs to remain in place until an operable
single-loan execution process is up and running. As the GSE portfolios
wind down, sufficient balance sheet space needs to be maintained to
aggregate loans from smaller lenders who are not yet ready to
securitize.
Second, the FHFA securitization platform initiative needs to
include plans for the acceptance of small lot deliveries into
multilender pools, perhaps initially designed as an expansion of Fannie
Mae's Majors program. Every effort should be made to further simplify
this program so that it can be a viable, competitive option for lenders
of every size.
Making the secondary market work for smaller lenders is critical
for providing a competitive market, which ultimately benefits
homebuyers. Policy makers should take the steps available today to make
sure that secondary market reform provides smaller lenders with
opportunities for direct access.
MBA is eager to work with the Chairman, Ranking Member Johanns, and
all other Members of this Chamber and the Congress as a whole to ensure
that the mortgage market in American remains vibrant, competitive, and
accessible.
LETTER SUBMITTED BY CHAIRMAN TESTER FROM B. DAN BERGER, EXECUTIVE VICE
PRESIDENT, GOVERNMENT AFFAIRS, NAFCU
LETTER SUBMITTED BY CHAIRMAN TESTER FROM DOUGLAS M. BIBBY, PRESIDENT,
NATIONAL MULTI HOUSING COUNCIL; AND DOUGLAS S. CULKIN, CAE, PRESIDENT,
NATIONAL APARTMENT ASSOCIATION